I was talking to my financial advisor about hedge funds and I was telling him about a strategy that I heard some manager uses. My advisor said the strategy was too simple and that hedge managers use way more complex strategies. I have books about fund management that use portions of game theory and certain statistical functions that seemed pretty complex. are equations and statistical factoring the standard in hedge funds...
To make money in any markets, the participants muct go beyond a certain level or threshold of difficulty. It is never an easy process. And the simpler strategies tend to take the hardest time, effort and are the most difficult to implement.
If the strategy cannot be written/explained on a lunch napkin, then it is not profitable. Your financial advisor needs a financial advisor, as for you, you need to change your financial advisor or become a financial advisor.
Lots of hedge funds simply buy stocks or do covered calls. The strategies do not have to be complex, people start them to earn the great fees so any strategy is up for grabs.
So what is this theory called, the Lunch Napkin Theory ?? Anyone can explain anything on a Napkin, but the question remains as to.. to you, the reader will you be able to comprehend it. Thus, it is not the "strategy" that needs work, but rather our minds.
No, most hedge fund strategies are quite simple. But they must be accompained by a careful risk study. A simple risk measure would be to know how much volume they hold relative to average voulme. Funds usually trade less than 5% of daily volume (10% at emergency exits), so they can calculate how fast they can get out. Now they calculate how much this security may plunge during the time it takes to get out.
There really is no answer to this. There are traders out there that don't know a thing about game theory that make great returns on a consistent basis. At the same time, there are also many quants making great returns using their complex algorithms. It depends on how the trader is most effective in approaching the market.
this is interesting.... a lot of what I read about in hedge fund strategies is risk management. as far as my financial manager goes, he is probably just naive as to what hedge funds do. he probably think its some highly complex "magic" being worked at hedge funds. I don't fault him for that.
many of the trading strategies are pure bullshit. example would be defining a simple moving average using incomprehensible academic jargon such as "Efficient moving average transform-based subsequence matching algorithms ". When it's nothing but a f'n moving average found on a retail platform. After the excessive fees, the vast majority of managers actually lose money for the investors. unless they're trading insider information, they're like any other retail trading schmuck.