Very well... I think we should agree to disagree on this for now and let everything evolve in the fullness of time. BTW, it may be more interesting, but also easier and less contentious, to discuss all these issues in the context of the RCG Sequoia Fund, instead of PS.
Martinghoul, I see you are completely opposed to the use of Kelly or Optimal F. In your opinion which are the better rules to go by?
No, I am not at all opposed, since it's horses for courses, so to speak. I am only suggesting that, if one uses these methods, one should be consistent and diligent in their application. As to my personal preference, I use a different approach for my risk decisions, since I operate under a variety of constraints other than leverage. Basically, it becomes a relatively complicated linear optimization problem. For a pretty decent, but brief exploration of the application of Kelly, you could do a lot worse than this: http://epchan.blogspot.com/2006/10/how-much-leverage-should-you-use.html
Since I am into math, would you mind (if you got the time) explain your approach and methodology? I believe it would give me a good perspective of the actual methodologies used inside hedge funds.
It's kinda tough to explain, tbh, since it has a lot of inputs. Basically, the idea is that you need to maximize your ex ante Sharpe ratio, while minimizing the use of scarce resources. When I talk about scarce resources, I am referring to the various constraints, such as VAR, leverage (however you define it), stress exposure, unwind cost, etc etc etc. So like I said, it's a large and somewhat hand-wavy linear optimization problem. You can impose some limited structure on the process, but full-blown automation is really out of the question.
I was thinking that exact thing. That fund, its just clear cut. They violated your principles and they guy running it risked his career in an investment he fell in love with. As a result he got fired and now the fund is extremely vulnerable to an avalanche of redemptions should the SPX drop 10% or so. I don't think they got any gates
Since we are on the subject, which other papers, articles, books do you recommend on the subject of risk management?
Well, firstly, I won't recommend the obvious, such as stuff by Taleb. I am a big fan of Aaron Brown. While it's not perfect, I think his book "Red-Blooded Risk" is very insightful in a lot of ways.