Trading Like A Hedge Fund

[virtualmoney]

Quote from Rationalize:
Quick, call the fire department, someone said cointegration, hose that guy down.

What's cooking? You arse on fire?

 

[oldtime]

Quote from virtualmoney:

Given a Stock(or Collective of instruments)that follows an index say Dow with a beta<1(very short term) & beta~1(a week or more) so that it is hedged slowly in an uptrend, but also falls much slower than the index when the market drops suddenly...to form a profitable spread,
what are the factors in implementing such a hedge fund lagging beta strategy (short fast,long slow)?

What aspect of collective CoIntegration to look out for?

Is correlation relevant in this approach?

Can options of a similar index(e.g SPY) be used to mimic the lagging beta part?

in real time, years ago that trade became so effiecient that there isn't even a crumb left over for you or me.

Yes, you can improve the spread by averaging down one side and closing at BE, but what's the point? Now you have a wide spread on something that is just going to move point for point.

 

[CoolTraderDude]

Quote from virtualmoney:

Given a Stock(or Collective of instruments)that follows an index say Dow with a beta<1(very short term) & beta~1(a week or more) so that it is hedged slowly in an uptrend, but also falls much slower than the index when the market drops suddenly...to form a profitable spread,
what are the factors in implementing such a hedge fund lagging beta strategy (short fast,long slow)?

So we have a stock say XYZ with low correlation to the Dow under a week... Say daily movement... But after... on a weekly time frame it will do what the Dow does... XYZ rises slowly with the Dow but also falls slowly...

Now I don't have much experience with this kind of trading as I've only started looking into it.

I'm not sure what other factors there might be...

Let's say you see the Dow rising... You wait for it to stop... You buy XYZ which lags, and sell Dow... If the the Dow falls then it should fall faster than XYZ... So you should make money... If the Dow rises it should rise faster than XYZ but you will be hedged as XYZ will correlate on a longer time frame...

That's how I'd look at it...

Quote from virtualmoney:What aspect of collective CoIntegration to look out for?

Errrr... I'm going to go with their stochastic drift...!?

Quote from virtualmoney:Is correlation relevant in this approach?

I don't think so...

Quote from virtualmoney:

Can options of a similar index(e.g SPY) be used to mimic the lagging beta part?

Yes... But only if you find the ones you want at a good price.

Quote from oldtime:

in real time, years ago that trade became so effiecient that there isn't even a crumb left over for you or me.

Yes, you can improve the spread by averaging down one side and closing at BE, but what's the point? Now you have a wide spread on something that is just going to move point for point.

There's also the problem that regression analysis is hardly a good tool for predicting future volatility... What if your beta changes on one of your securities...?