The Implications Of Schindler and VN

Trader5287, I would say that depends on how liquid the holdings of a fund are. Running $5bln in illiquid small/micro cap equities is a lot different than trading the highly liquid currency and interest rate/bond futures which are very liquid ($5bln is a drop of water on a hot stone in those markets).

Of course that doesn't mean liquid markets are completely foolproof, any market can become illiquid overnight due to force majeure such as terror attacks, earthquakes etc.
 
Okay thanks.

I've read in market newsletters that many HFs came under stress in January.

BTW Mr. Schindler if you are reading this I always admired you and still have in my office cabinet that wonderful write up in Futures Magazine where you were featured inside the back cover. I'm sure you'll do fine.
 
Quote from BJL:

Just checked recently, but the TA trading systems I researched for my graduation thesis 10 years ago still produce the same results.

Regarding your basic economic theory... you have to realise economic theory is just that.. theory, which doesn't quite work in the real world.

As to supporting evidence. Quite a few succesfull CTA's out there that have pretty decent returns over a long period. And despite all the hocus pocus what they're doing isn't all that sophisticated. Sure, they change their systems but one never can be sure if performance improved or whether it was actually detrimental.
More...

If pretty much all the world's top systems traders repeatedly state that competition and disclosure of methods degrades returns, and centuries of economic theory and business practise demonstrate the same, yet one person says that they found a sytem in their graduate thesis 10 years ago that "still works" (forward looking statement anyone?), which would you find the more credible piece of evidence? Even if you traded that system with real money and outperformed for the whole 10 years, that is still not proof of long-run profitability. Remember, you are not just claiming that inefficiencies can exist, or that systems traders can outperform (two claims I made myself), but that competition has *no effect* on long-run profits. That is just as extreme an absurd a position as the efficient market professors who state that no efficiencies exist anywhere, ever. You cite Google now - people were similarly citing Yahoo in 2000, IBM in 1980, yet they succumbed to the effects of competition too. Rest assured, Google definitely gets affected - if you don't agree, why not ask their managers and investors if they would prefer 1000 competitors, or none whatsoever?

As for economic theory not working in the real world, that's another unsupported assertion. There is ample evidence to support basic economic theory like the effect of supply & demand on price, the effect of competition on profits, the effect of monetary incentives on people's behaviour. You may be confusing economic models, which use unrealistic intial assumptions (e.g. perfect competition, unlimited capital, perfectly rational economic agents etc) for purposes of modelling simplicity, with economic theory as a whole. Economic theory will give accurate results in the real world to the extent that the assumptions used mirror reality - hence the comment in the second line of my post "given real world assumptions...".

Regarding CTAs with long-run records, how does this prove that competition doesn't degrade returns? I don't know any CTAs who publish their systems, which would benefit them if competition was not an issue. It would after all be a huge marketing advantage to be able to demonstrate how you make your returns and why they will continue. Yet successful CTAs are remarkably secretive about their methods. Could it be that like James Simons and David Shaw in the interviews above, they are well aware that competition will erode their profits?
 
Quote from Cutten:

Regarding CTAs with long-run records, how does this prove that competition doesn't degrade returns? I don't know any CTAs who publish their systems, which would benefit them if competition was not an issue. It would after all be a huge marketing advantage to be able to demonstrate how you make your returns and why they will continue. Yet successful CTAs are remarkably secretive about their methods. Could it be that like James Simons and David Shaw in the interviews above, they are well aware that competition will erode their profits?
More...
Is it not also possible that a CTA understands that if his methods are fully disclosed most potential investors would just execute the method on their own instead of hiring the CTA? I would definitely consider this a marketing DISadvantage.

jj
 
Quote from Cutten:

Remember, you are not just claiming that inefficiencies can exist, or that systems traders can outperform (two claims I made myself), but that competition has *no effect* on long-run profits.
...
As for economic theory not working in the real world, that's another unsupported assertion. Economic theory will give accurate results in the real world to the extent that the assumptions used mirror reality - hence the comment in the second line of my post "given real world assumptions...".
...
Could it be that like James Simons and David Shaw in the interviews above, they are well aware that competition will erode their profits?
More...

I never stated that competition will have no effect on profitability. Of course returns from crowded strategies will degrade. However, not to the point of zero profits. And I think they follow a fairly unpredictable cycle of high and low profitability.

Same goes for economic theory. As you say it's just that, and mathematically flawed by the way (but that's another discussion I have no interest in here). Most of the time increased competition will lead to lower profits but almost never to the point where excess profitability disappears.

As for not disclosing strategies. First, why would they? Secondly, I think their secrecy is their marketing trick and you'd be surprised how simple their underlying strategies will be. I have the experience where you tell investors what you do to make money and they say, it cannot be that simple there must be more to it.

You believe your thing, I'll just continue to make money trading simple stuff that works in the long run just like I did the last 10 years.
 
Quote from BJL:

I never stated that competition will have no effect on profitability. Of course returns from crowded strategies will degrade. However, not to the point of zero profits. And I think they follow a fairly unpredictable cycle of high and low profitability.

Same goes for economic theory. As you say it's just that, and mathematically flawed by the way (but that's another discussion I have no interest in here). Most of the time increased competition will lead to lower profits but almost never to the point where excess profitability disappears.

As for not disclosing strategies. First, why would they? Secondly, I think their secrecy is their marketing trick and you'd be surprised how simple their underlying strategies will be. I have the experience where you tell investors what you do to make money and they say, it cannot be that simple there must be more to it.

You believe your thing, I'll just continue to make money trading simple stuff that works in the long run just like I did the last 10 years.
More...

Well, you appeared in your early replies to dismiss the impact of competition. "Are you saying that profits don't get competed away when the business method is easily replicable?" A. "Quite so." Perhaps I misunderstood your initial posts, but given their brevity that is not surprising.

Anyway, you keep saying that these systems make excess returns (over the long run, adjusted for risk). I would simply ask if you can provide any figures to back this up?
 
Quote from Mathemagician:

Is it not also possible that a CTA understands that if his methods are fully disclosed most potential investors would just execute the method on their own instead of hiring the CTA? I would definitely consider this a marketing DISadvantage.

jj
More...

It's possible, yes, but for a startup CTA if the choice is between publicise and get half as many investors, or don't publicise and get no investors, the former should work, surely? You could just say "We use the same formula as [insert brand-name CTA here] and charge half as much - invest with us!" and if the method works then you should raise a fair bit of money.

For a real-world example, look at O'Shaughnessy and his fund - he published his method in a book, and raised hundreds of millions from investors. Why didn't they just use the publicly available method that he wrote about in his book? Presumably because their time was more valuable than his fees, and/or because they thought he would implement the strategy in a more rigorous, disciplined and efficient way.
 
Anyone who has spent some time investigating how the returns to merger arbitrage and factor model driven arbitrage have degraded over time will acknowledge how competition affects the margins on trading strategies just as it affects the margins on anything from a can of peanuts to your electricity bill.
 
You must log in or register to reply here.
Back
Top