Human Equity Analysts challenged by Quants

I think most of this ‘quant hedge funds’ are marketing scemes and don’t have an exploitable edge. Only a few of them are sofisticated enough to make ‘risk free’ returns. One of the best in this field is Ed Thorp.

http://webhome.idirect.com/~blakjack/edthorp.htm

As for most of the others I prefer to invest-trade my money myself knowing exactly what risks I am taking and why, rather than putting faith on ‘black box quant strategies’ that can end up like LTCM.
 
Quote from edgetrading:

That's so true. But then why is so much of the information/advice on this site based on technical analysis?
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That is an easy question to answer

First, those who provide the so-called "information" are often for lack of a better word "posers". As a result the "information" is of very poor quality....For many reasons, ET members often feel the need to post and offer lengthy and profound comments on subjects they know little about.

On the other side of that you have newbies who know nothing and yet are unable (perhaps unwilling is the best word) to do any of the hard work that is required to learn the business. As an example, I have often suggested to newbies that they stop trading, and learn how to research (meaning learn basic statistics, learn how to use Excel, learn how to backtest, and how to properly interpret backtest results). To this date, and after a couple of thousand posts, almost no one has asked me for help with basic statistics, with Excel, or with research methods.

There you have it..a majority of members who don't know what the hell they are talking about, offering all kinds of "information" to a group of newbies, most of whom are unwilling to take the time to learn the important skills relative to trading...

What always makes me laugh is the threads and posts about "why so many traders lose (or "loose" depending on the poster's IQ and language skills).

Good luck

Good luck
Steve
 
What a very good post by Steve 46.

Somebody above mentioned Ed Thorp. You have only to look at the qualifications of such men to reaise what Steve 46 is talking about.

I recently asked a friend who is a partner (now shareholder) at Lazards to interview a nephew of mine who is studying at UCL in London.

The interview was daunting - only the most highly numerate need apply. On top of that the successful candidates usually have several languages.

Much the same applies to all the top investment banks these days.
 
Thanks for all the kind replies.

I wish I could go into systems that I have seen that have a mathematical edge. However, there are plenty of examples from history, and some here on ET.

Read about how LTCM priced newly issued bonds vs bonds that had been issued for a while. They understood the YC and the general overpricing of newly issued bonds vs older issued bonds. The key to the whole thing is that this strategy is interest rate neutral because changes in IRs would affect, in this case, the YC of both equally. So basically it was close to free money to play the convergence of the two.

Look at the way traders trade Merger Arbitrage. If the deal goes through, and you trade accordingly, it is free money with a certain mathematical edge.

On far less certain footing, but still statistically viable systems, look at:

Pairs Trading. For example:

Fundamental Pairs: Easyjet/ Ryanair, Glaxo/ Astra
Merger pairs trade: Sanofi/ Aventis, AT&T/ Cingular
Dual Listing arbitrage: Royal Dutch/ Shell
Holding Company arbitrage: Christian Dior/ LVMH
Share Class arbitrage: VW preferred shares/ VW ordinary shares

The key to many of these systems is the "Law of one price."

Or Look at the Opening Only thread by Don Bright.

Etc etc...

There are others, but I can't get into those.

nitro
 
Ok, fact 1: These quants make 5-20% returns. Maybe 30% in the case of Renaissance.

Fact 2: Nitro and some others say 1 in 100 traders use indicators, rest use math edge.

Implication 1: 99 in 100 use fundies (and mutual funds do worse than the index) or quant methods (see returns above) - so 99 in 100 are NOT getting 40%+ returns consistently.

Implication 2: Basically noone gets really good returns trading.

New fact 1: I know some people who make 100-300% a year and have done for five years.

Implication 3: Dont listen to everything Nitro and Braswell say else you will end up in the 99 out of 100 who make 5-30% a year.

There is nothing special about 'quant data' that is 'better' than indicators. If there was then these "99/100" would be getting better returns than they do.

Question 1: Nitro - so you use quant methods unrelated to indicators? Some OHLC stuff? So you get the same average returns as all the other quants?
 
being heavily quantified is not the only single correct way to trade, nor is it the holy grail. there are good quant systems and bad quant systems and when the market atmosphere changes, only the good traders/systems will survive.

sure LTCM had a mathematically quantifiable edge, but I could also argue that they had NO IDEA how to trade. They had no idea about risk management, greed, and the other emotional aspects of trading. Sometimes quants fail to understand that you can have every mathematical reason to put on a trade, and you may even be right on the direction of the trade but at the same time if your position size is too large and you are overleveraged, you are wrong on the trade.

the bonds LTCM was playing with would have eventually converged if given enough time, but the trade was bad.. they used way too much leverage in that trade.


The fact is an edge could be anything that gives you a positive expectancy, and quantitative methods are only one means of achieving it. Quants are hot on the street right now.. and we have been in a long running bull market with record topping profits for ibanks and hedge funds.


Personally, I think quant methods are a great way to take emotions out of the picture in trading. But I think everyone saying that the market environment has changed due to algorithms is overplayed. As livermore said.. speculation is as old as the hills, and it will never change cause human nature never changes. The next time a bubble comes along you will see that 1998-2000 volatility again.
 
Quote from nitro:

The rest are providing liquidity nitro
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In other words, the only profitable traders are utilizing some form of market making algorithm? No hope for alpha predictors, in your opinion?

Just wondering
 
Quote from HiFreekTrader:

In other words, the only profitable traders are utilizing some form of market making algorithm? No hope for alpha predictors, in your opinion?

Just wondering
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It is so hard to explain without going into details, and I mean that.

It is not so much a market making algorithm (or trading style) that is superior, but the general case of market making which I call Relative Value algorithm which includes market making as a special case. When you take liquidity, it is usually out of momentum. When you provide liquidity, it is because relative value is at edge if you get filled, and in the extreme case the relative value fill is actually an arbitrage, which I further distinguish between soft (statistical) or hard (the profit is locked) arbitrage.

There is always a fine balance between momentum and relative value trading, since if you misjudge the momentum, you will most likely get run over unless you are a real market maker and are hedging the position with an underlying, or turn around and go with the momentum, but that is second guessing yourself imo.

Market making is too strong a word I think. Relative Value is probably closer, but not it either. Although, market making is an extremely lucrative and low risk proposition if done right.

nitro
 
Quote from nzbryant:

...So you get the same average returns as all the other quants?
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The methods that I am interested in require intensive capital. They easily scale to $100M+. They are very low risk (5-10% drawdowns max) and are in the 25%-35% (using no leverage) returns a year category. They would rarely have more than two losing months a year, and are extremely unlikely to have two losing months in a row.

nitro
 
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