Human Traders Are Trouncing the Machines

[sle]

How ironic that Bloomberg is reporting that most of the Quant strategies adopted by assets managers aren't generating any quantifiable positive returns, let alone alpha.

I read that editorial and have a few comments:
1. If you look at the recent performances, nobody has any alpha, especially none that beats S&P 500. Aggregate performances display statistical significance over decades, not even years - any statements like “well, convertible bond funds have not made any money last quarter” are silly.
2. He sounds oh so much like a friend of mine that in 1999 was saying “all that internet is a fad”. We all know how that turned out. Historically, these things follow a hump-dip-plateau curve and I think quant trading is not any different.
3. People do have a tendency to think that a single way is the only right one. It surprises me that any markets professionals would have this religious tendencies, be it in quant trading or investing based on fundamentals.
4. I think ideal professional is the one that can think of things from quant perspective or fundamentals, mix the two up, code something and possibly keep the discretionary aspects etc. It’s a skill set that’s hard to find but that’s what a trader should strive for. To quote the greats “Specialization is for insects”

 

[Eurokopek]

I think what's going on right now is that lines between systematic and discretionary strategies are getting blurred. We are going to see that more and more - for example, I am primarily systematic, but for some things I make manual decisions simply because it's easier and there is learning benefit in doing things by hand for a while before automating them.

I don't believer in "systems" either, or it just might be that I do not understand the meaning of that word. If by "system" you mean a set of simple trades/indicators that would make money no matter what with some probability, then I don't believe in systems.

What I do believe in is that every good trader has both the strategical and tactical approaches. The strategical approcha might be "it's good to be short gamma" or "i believe the market overprices the wings", however, the tactics might dictate otherwise at the current moment.

Have you changed your views over time or your definition of systematic is different from your definition of a system?

 

[sle]

Have you changed your views over time or your definition of systematic is different from your definition of a system?

When did I write this, out of curiosity?

Probably the former, though it's hard for me to remember what my definition of a system was way back when. I drifted more toward a systematic approach over the last 7-10 years. Partly it was because I got a broader mandate with the resulting diversification so I can tolerate losses from a single strategy better. Partly I did so because of the lifestyle benefits of being on the systematic side (we got cookies).

My current definition of systematic is that you have a quantitative pipeline (usually implemented as software) that allows you to transform a recurrent market anomaly into a repetitive trading strategy. The mode of execution is secondary, but automation does allow to run multiple strategies at the same time. There is still a component of discretion in it (which is impossible to avoid, you will have to make decisions at some stages), but for the most part as long as the anomaly there you keep doing the same thing.

 

[Eurokopek]

a long time ago.. 2005.

 

[Overnight]

a long time ago.. 2005.

Heh, speaking of "kopek"...Wasn't that a USSR thing a long time ago? Yay Lithuania and the other Baltic/Slavic states! Way to stick it to Gorbachev and his funny men! They collapsed the Soviet Union like a fat domino that fell into a huge bowl of borscht.

Bloody commies. Yeltsin for the win. Oh wait, he's out, now we got the bare-breasted Putin guy, who licks nipples with other foreign heads-of-state. Good lord, we're doomed!

 

[sss12]

When did I write this, out of curiosity?

Probably the former, though it's hard for me to remember what my definition of a system was way back when. I drifted more toward a systematic approach over the last 7-10 years. Partly it was because I got a broader mandate with the resulting diversification so I can tolerate losses from a single strategy better. Partly I did so because of the lifestyle benefits of being on the systematic side (we got cookies).

My current definition of systematic is that you have a quantitative pipeline (usually implemented as software) that allows you to transform a recurrent market anomaly into a repetitive trading strategy. The mode of execution is secondary, but automation does allow to run multiple strategies at the same time. There is still a component of discretion in it (which is impossible to avoid, you will have to make decisions at some stages), but for the most part as long as the anomaly there you keep doing the same thing.

@sle. In a very elementary form, isn't running a scan using a pre packages syntax(ie: stock charts.com advanced custom scans) for identifing securities for further condideration on a discretionary basis along these lines. (emphasis on elementary).

 

[sle]

@sle. In a very elementary form, isn't running a scan using a pre packages syntax(ie: stock charts.com advanced custom scans) for identifing securities for further condideration on a discretionary basis along these lines. (emphasis on elementary).

There is a bunch of "quantamental" funds that do more or less that. As long as the process is rigorous (e.g. apophenia in the form of chart reading is not) and quantiatively sound, it totally fits the bill of "systematic trading". Everything else is very flexible. For example, in my space, I have strategies that are fully model driven (i.e. I know what the price of the security should be) but I also have strategies that use mostly empirical phenomena, as long as they are statistically significant.

a long time ago.. 2005.

Shit, I've been working in this industry for too long :/

 

[ironchef]

HUMAN TRADERS ARE TROUNCING THE MACHINES
The contemporary low volatility trading environment has been kind to actively managed equity funds – particularly if they piled into large-cap momentum stocks like Facebook and Amazon, which have been responsible for the bulk of this year’s rally.

But while active managers have enjoyed three quarters of strong returns, quant funds – purportedly the future of asset management, according to many an “expert” on Wall Street – are falling further and further behind. As Bloombergreports, during the first nine months of 2017, the average equity fund was up 9.7 percent while quant funds rose only 0.6 percent, according to data from Hedge Fund Research.
https://www.marketarmor.com/2017/10/10/human-traders-are-trouncing-the-machines/

And the next Bloomberg headline will read:

Small mom and pop retail traders are trouncing professional mutual fund, hedge fund managers and the machines.

 

[themickey]

http://m.futuresmag.com/2017/09/30/revenge-humans

 

[DeltaRisk]

HUMAN TRADERS ARE TROUNCING THE MACHINES
The contemporary low volatility trading environment has been kind to actively managed equity funds – particularly if they piled into large-cap momentum stocks like Facebook and Amazon, which have been responsible for the bulk of this year’s rally.

But while active managers have enjoyed three quarters of strong returns, quant funds – purportedly the future of asset management, according to many an “expert” on Wall Street – are falling further and further behind. As Bloombergreports, during the first nine months of 2017, the average equity fund was up 9.7 percent while quant funds rose only 0.6 percent, according to data from Hedge Fund Research.
https://www.marketarmor.com/2017/10/10/human-traders-are-trouncing-the-machines/

You'd actually be surprised. I've worked buy and sell side, machines are only information. You've got to think outside of the box to make it in trading.

Algo's can help but they aren't the answer.
You need to be smarter than Wharton and Harvard grads, not in everything, just in trading. You find one true edge and you'll be a multimillionaire in less than a year, no algo can do that.