We all know what LTCM propeller heads did in terms of risk modeling, and how they ended up, due to huge leverage and unexpected correlation with the rest of the ltcm trader, lack of liquidity on the other side, etc. Low beta, high alpha, low vol, low drawdowns, high sharpe, etc SPY is about even during the same period.
It's been well-established ltcm trader Q is a bit of a seat-of-the-pants, learn-as-you-go operation which is sorta the definition of a start-up, unless it is doomed to fail.
This may sound like a criticism, but the context is that I don't think anyone has ever attempted quite what they are trying. They can fail ltcm trader being knuckleheads and repeating the past the LTCM path, I guessbut maybe they'll have an edge because the new thing they are attempting will succeed. Access to tools like the research platform and the backtester, coupled with data, all for free well, not quiteavailable to some guy in his pajamas in the middle of nowhere is new, I think.
It might ltcm trader, it might not. At least it is different. But I don't have a finance background--maybe it ltcm trader obvious that they are doomed to fail, at a gross level. Anyway, what do users have ltcm trader lose? If Q succeeds, they make some money.
If they fail, well, researching and coding algos is less mindless than watching TV and drinking beer. Grant, the concept is cool, Web 3. But whoever is setting the criteria for ltcm trader algos is setting it up for failure. That is the main message. The tooling here is great, but it is not the best, and it is not even close to institutional level tick data, options, etc. Ltcm trader have said in the past and I stay true to this: I would pay a premium if they offer options backtesting, even with end of day ltcm trader.
I think a reasonable membership fee PLUS the ltcm trader fund if it takes off should make Quantopian a more viable business I'd be interested in hearing what they should be doing differently. Are you saying it doesn't make sense to do an equity fund? And if so, for what reason? Or is it that the guidelines and selection criteria are wrong and should be changed, ltcm trader otherwise an equity fund could work?
You may have ltcm trader good point that no Holy Grail will be found. No reward without a proportionate risk. But there is the advantage of not needing to pay quants salaries and benefits. No additional expensive ltcm trader Boston floor space. And they'd be under the influence of a few Quantopian managing directors who would inevitably herd them to be less creative and diverse than a crowd-sourced approach.
Ltcm trader figured if you combine a bunch of uncorrelated assets, the net portfolio correlation and its correlation to the market can be zero, i.
They figured since there is almost no risk and the return is small, why not use leverage to increase the return multifold? And so it all started. Is this eerily familiar to you already? Replace "assets" with "algos", and you have Quantopian value porposition.
The other thing is that derivatives must be used if you can call something "hedged" with a straight face. That is the main drawback. I will ltcm trader some more, but these are the main points Personally, I think they may reach a point where they'll need to understand algos in detail i. My hunch is that there will be some legal problems, or some big honkin' investor will stipulate that the ltcm trader must be reviewed line-by-line. They can pull it off at this point, because it is their own small pot of money at risk.
If they cave into this, then it is over for them, since they will lose all their free lance algo writers such as yourself. This is what major brokerages like Ameritrade do with firms like Citadel, and I know for a fact that IB plays the order flow game.
Ltcm trader is a huge money maker, but in the end, it boils down to a bet on the IB ltcm trader that the Quantopian users represent ltcm trader money. Not very motivating, I know.
Personally, I wouldn't mind sharing code with Q, but I recognize this may not be the sentiment of many. I'm not planning to trade my own money with the kind of long-short algos they are looking for: Besides, it doesn't seem like the kind of thing where there will be some kind of alchemy, a mysterious inefficiency known only to the author, which will fulfill his dream of getting rich on Wall Street, but only if he keeps it ltcm trader.
And if what you are saying is true, everyone should just put their money into a basket of ETFs and forget about it. So, revealing code would not have a downside, but only increase the probability of a risk-free gain.
If folks are worried about Q just using their code i. Ltcm trader angle is that some users may be using information that they shouldn't i. Maybe they are worried about getting caught? Ends up being a recruiting effort. Maybe order flow is already being sold. I haven't heard them deny it. I kinda wonder if they ltcm trader this thinking in mind with Robinhood, since I can't understand how it fits with the crowd-sourced fund model.
Lot's of good points, but let's not forget that inefficiencies disappear as soon as they get crowded, so the goal of everybody on Wall Streeet is to remain as nimble and under the radar as possible when trading. Arguably they had some Nobel winning propeller heads at the top who pretty much represented ltcm trader entire selling point, all else was a black box. So, yes the goal is to be black box, to varying extents, otherwise there is no reason for someone else to hand you over their money.
Just speculation on my part. Adding futures was a move in the wrong direction, in my opinion, since you are not going in the direction of a "hedge fund" but you are going in the direction of a black box "CTA".
Yes, but in these cases, the principals "propeller heads" presumably know what is inside the boxes. Q is different, I think, in that there could be some real surprises in ltcm trader boxes.
The risk would seem to be different. Indeed, but always rooting for the good guys, hoping that if that does not pan out, they will monetize the platform. I personally would not care if they sold my order flow, since I do not care about minutely pricing. Ltcm trader I do want to be able to overlay my strategy with options, i. I would pay a premium to test my secret sauce strategy on hundreds of underlyings.
Seems like I always find myself running into a wall of volatility, and then wanting to back test if said volatility had been trading at a discount on the CBOE. Frank, on average, realized vol is smaller than implied vol, making the case ltcm trader option selling Sorry, something went wrong. Try again or contact us by sending feedback. The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian.
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Hello BT, It's been well-established that Q is a ltcm trader of a seat-of-the-pants, learn-as-you-go operation which is sorta the definition of a start-up, unless it is doomed to fail. Well, by their own analyses, they are getting a lot of over-fit algos: LTCM and plenty of other still active ltcm trader gathered billions in AUM while being total black boxes Yes, but in these cases, the principals "propeller heads" presumably know what is inside the boxes.
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Years ago, I visited the trading floor at Salomon Brothers, which at that time prided itself on being the biggest, most aggressive trading house on Wall Street. Rounding a corner, I came upon a quieter area, which, at first sight, looked like the systems department. Dozens of computer monitors were stacked on top of each other, and endless lists of numbers were scrolling down their screens.
In ltcm trader of ltcm trader monitors, five or six nerdy-looking men were watching the numbers and ltcm trader. Their shirts appeared to have been bought at Syms, not Barneys. Their ties were ill-fitting. Their hair cascaded around their ears. For several years, ltcm trader created hundreds of millions of dollars in annual profits for Salomon. Then, in the early nineties, they quit, moved to Greenwich, Connecticut, and set up their ltcm trader investment firm, Long-Term Capital Management, where they made hundreds of millions in annual profits for themselves.
Last summer, their luck changed: In the end, they managed to stay in business, but only just. The near-collapse of Long-Term Capital prompted thousands of articles, several official reports, and at least two books. We now know how much money Long-Term Capital lost about four billion dollarswhere the money was lost all over the worldand why it was lost the nerds got their sums wrong.
In other ways, though, the media outpouring has served to confuse rather than to inform. That probably suits the big Wall Street firms that rescued Long-Term Capital just fine, because it shifts the focus from where it ought to be: Long-Term Capital got itself in trouble by borrowing too much money and investing it in fancy ways that it mistakenly believed to be safe. Morgan, and Morgan Stanley Dean Witter, which were falling over one another to do business with it.
Long-Term Capital was, to be sure, a hedge fund—like any unregulated investment fund ltcm trader manages money for rich investors—but it was a very unusual hedge fund. Ltcm trader many ways, it ltcm trader more like the proprietary-trading desk of the major investment house where most of its partners started out. If, as many commentators ltcm trader argued, hedge funds like Long-Term Capital are a potential menace to the capitalist system, the same must be true of their illustrious siblings on Wall Street.
To argue otherwise is to ignore the way in which the financial industry has developed over the past few decades. Twenty years later, there were about a hundred and forty such funds; today, there are around three thousand, and the assets under their control amount to almost a trillion dollars. Nobody knows the exact figure. In terms of assets, hedge funds are now about a quarter the size of commercial banks, ltcm trader about a fifth as large as mutual funds.
Certainly, there are some important policy issues arising from the recent proliferation of hedge funds. Whereas commercial banks are regulated by the Fed, and securities firms are regulated by the Securities ltcm trader Exchange Commission, hedge funds are not regulated by anybody.
Indeed, they are legally exempt from the two major pieces of legislation which govern other firms in the financial industry: In order to remain exempt from the Investment Company Act, hedge funds must have fewer than a hundred investors, or, alternatively, their investors must be worth at least five million dollars each.
In order to avoid the reporting requirements of the Securities Exchange Act, hedge funds must have fewer than five hundred investors. The securities laws were designed to protect ordinary investors from Wall Street tricksters. Rich people were viewed as smart enough to look after themselves.
Some hedge funds file cursory annual statements to the Commodity Futures Trade Commission, which oversees the futures markets. Although hedge funds are often classed together, they come in all shapes and sizes. The vast majority of hedge funds are small, with less than a hundred million dollars in capital. About thirty or forty hedge funds have more than a billion dollars in capital, and five or six are major financial institutions, with more than five billion dollars in capital. At its peak, Long-Term Capital Management, which started trading in February,was one of the latter, and it was atypical in other ways, too.
The firm was founded by John Meriweather, a reclusive type who had previously been in charge ltcm trader bond trading at Salomon. Meriweather was responsible for hiring the young professors and ex-graduate students, who were well versed in the mathematical models of finance that have been developed during the past thirty years. A senior Salomon bond trader, Paul Mozer, was accused of trying to corner the market. Meriweather moved to Greenwich, taking Scholes, Merton, and the rest of his nerdy crew along with him.
The new firm had no trouble ltcm trader money, despite the fact that each investor had to put up at least ten million dollars for three years. Instead of playing hunches, traders at Long-Term Capital used computers to discover temporary pricing anomalies between similar securities.
At one point, for example, the firm sold newly issued thirty-year Treasury bonds and bought thirty-year Treasuries that had been issued a few months previously and were yielding a slightly higher rate of interest. In another instance, the firm bought high-yielding Italian bonds while ltcm trader lower-yielding German bonds of the same duration. This element of predictability seemed to offer the prospect of healthy investment returns at minimal risk.
Since Long-Term Capital placed its bets in a wide variety markets in dozens of countries, it also appeared to be well diversified. Even if some of its bets turned sour, others would surely pay off, thereby limiting the downside, even in adverse markets. Enthusiasm for the new venture spread to the public sector, too.
The Italian central bank and the Bank of China both took stakes. They ltcm trader also eager to find out how Meriweather et al.
In andLong-Term Capital delivered annual returns of more than forty ltcm trader cent; inthe figure was about twenty per cent. At the time, many people attributed this stellar performance to the genius quotient in Greenwich.
In addition to the two future Nobel winners, the firm counted among its partners two former Ivy League professors and a former vice-chairman ltcm trader the Fed. A person with a hundred ltcm trader who borrows another ltcm trader and invests in a stock that ltcm trader up by ten per cent sees his capital increase not by a mere ten per cent but by twenty per cent.
If the ltcm trader with a hundred dollars borrows a thousand dollars and the stock goes up by the same amount, his capital doubles. Unfortunately, when things go wrong the leverage works in reverse. If, instead of going up by ten per cent, the stock goes down by ten per cent, the person who has borrowed a thousand dollars sees his capital wiped out.
Following the Great Crash ofwhich ruined many leveraged investors, the federal government introduced strict limits on speculative borrowing. Mutual funds, for example, ltcm trader borrow fifty cents for each dollar they have invested in stocks.
Commercial banks can borrow more, but they, too, must meet strict capital requirements, and so do securities houses. Hedge funds, ltcm trader the other hand, can borrow as much money as their creditors are willing to lend them, and in the case of Long-Term Capital that was a vast ltcm trader. The arithmetic of leverage proved inexorable. Three weeks later, it ltcm trader fallen a lot further, and Meriweather and his partners were on the verge of bankruptcy.
To some leading financial economists, ltcm trader is about all there is to the Long-Term Capital story. Most were arcane transactions involving futures, swaps, options, asset-backed securities, repurchase agreements, and the rest of the ltcm trader of modern finance. These instruments come in a bewildering variety of forms, but they all facilitate the construction of big leveraged positions. Long-Term Capital had more than sixty thousand trades on its books when it got into trouble.
Each of these transactions had a counter-party, which took the other side of the trade, and it was usually a big commercial bank or a big investment bank. The fear that these banks would start dumping their positions simultaneously, ltcm trader move that could have triggered a general financial panic, prompted the Fed to intervene. Since Meriweather and his partners viewed their creditors as competitors, and rightly so, they were reluctant to give out any information about their own finances.
That was one of the problems. Why were powerful Wall Street firms willing to extend so much credit to what was, to all intents and purposes, a blind investment pool?
For one thing, Long-Term Capital, which ltcm trader incessantly and on a massive scale, was a big source of fees and commissions.
At the same time, the firm posted collateral for its speculative positions, and this generated a false sense of security.
This was an illusion, of course. Ltcm trader Long-Term Capital appeared to be well diversified, it was actually making a gigantic one-way bet, a circumstance that did not become clear until August of last year. The essence of the bet was that the gap in interest-rate yields between liquid securities and less liquid securities would narrow. Liquidity refers to the ease with which assets can be bought and sold.
A Treasury ltcm trader is extremely liquid. Ltcm trader junk bond is relatively illiquid, so its yield is higher, to compensate the investor for the difficulty that he may have selling it. Instead, they widened—to an extent rarely ltcm trader before. After Russia defaulted, investors all over the world dumped illiquid securities and tried to buy more liquid ones. A few months later, the markets settled down and the yield spreads narrowed somewhat, but by that time Long-Term Capital had been ltcm trader over by its creditors.
The average leverage ratio ltcm trader the five biggest investment banks was a remarkable twenty-seven to one. True, securities firms and commercial banks have more diverse sources ltcm trader revenue than hedge funds have, and they are subject to government regulation, but they also have higher operating costs, and, in some cases, ltcm trader assets may be even more illiquid—both factors that would make them vulnerable in a crisis.
Like Long-Term Capital, the big Wall Street firms rely on a diversified portfolio of assets, with a large number of offsetting positions, to prevent such an eventuality. But because they have tens of thousands of trades ltcm trader their books it is far from easy to measure the over-all level of risk they are taking.
Ltcm trader popular method is to use value-at-risk models—mathematical toys that simulate the effects of big market movements. Unfortunately, such models are usually based on recent data, and they tend to break down in the sort of crisis that occurred last August and September. For some Wall Street veterans, the main lesson to be drawn from the Long-Term Capital story is that the current regulatory framework, which was created sixty years ago, is hopelessly outdated.
Even the far more modest idea of bringing hedge funds under official supervision has been rejected, largely because of a fear that it would encourage them ltcm trader set up shop overseas, where their activities would be even more opaque. That is slightly unfair. Forcing hedge funds to file quarterly financial reports would require more action by Congress.
Miller is right about one thing, though. Even if a bill does make its way along Pennsylvania Avenue, there is scant chance of its being voted through any time soon. The questions raised by the Long-Term Capital saga are almost certain to arise again. It could equally well be a big investment firm or a commercial bank that needs a bailout. Shop Sign in Link your subscription.
Rejections have boldface p-values (rounded to nearest percent). Nonsignificant violations have their p-values listed (rounded to nearest percent). When a theory fits consistently in Cash I and Cash II, it is in italics. If it fits both stimulus sets, but ltcm trader is no weighting function that yields ltcm trader best fitting vertex for both stimulus sets, then the fitting vertices are in smaller font.