Neiderhoffer

Sorry Risk, I wasn't ignoring you I thought we were done until I saw your comment.

As I mentioned in previous posts, I won't post content on the site until Baron makes a few changes, but I will say the following

Most folks here don't enough background to appreciate what hedging involves on this level. If you were to ask Marketsurfer what moments 3 through 6 represent, aside from what he could learn googling it, he would have no clue. Even in your own comments, I sense that this isn't your cup of tea.

While it may not be easy to hedge the position that Pabst talked about it could have been done. Hedging a short put position isn't just about trying to offset using futures. There are in fact many types of hedge techniques including timed hedges, graduated hedges and tranche hedges using other option positions, using other related instruments. As an example, in institutional markets (like CDO's) the most efficient hedges are "like kind", that is you offset a tranche of CDO's with another tranche of CDO's using a reduced form normal copula or structural variance gamma models. In my view, what is the point of trying to talk about it with folks who aren't really interested. From the begining this thread was really about whether "Mr." Neiderhoffer's fund blew out or not...and thats fine, I can take it for what it is.

 

There is no seventh moment in vanilla equity options, period. Vanilla equity exposures [of any magnitude] are limited to four moments, so it's borderline-hilarious in this context. I don't understand why you're mentioning it now, as you never made reference to it in the earlier post. I am referring to your stance that Vic didn't sell naked.

Nitro was parroting some sh*t he overheard at the water cooler. I was specifically addressing your inference that Pabst, et al, were FOS.

Seventh-moment risk is a "dspot" risk [convexity to spot] on compound options. Vic sold puts and bought futures, so I understand how that mistake could be made.

Thanks Steve.

 

I may be woefully out of my depth here, but timed hedge? Graduated hedge? I am not familiar with those terms in this context. I rely on canned-models and actually have to trade this stuff, so I'd love to know... but how do you escape jump-risk? I assume you're referring to replication here... what strike/tenor would you have recommended Vic purchase to hedge his monumental gamma and third-moment risk?

 

It looks like August was actually good for Roy's funds. The reason I keep mentioning him, because Surf used him as an example of Vic's students, although:

1. It is clear that Roy doesn't use Vic's strategies.
2. The 5 years performance of his fund was lucking, although the last 3 years were better.

Anyway, here is the info:

" August returns for hedge funds and commodity trading advisors alike were not pretty, to say the least. But while a pair of Florida-based trend-following heavyweights wilted—in terms of both returns and assets—last month, a notable New York-based countertrend trader showed hedgies and CTAs just what it means to be uncorrelated.

Roy Niederhoffer’s contrarian trading strategies soaked in August’s volatility and profited from trades in the fixed income, equities and commodities markets but lost money in currencies. Niederhoffer’s Diversified program, Negative Correlation Fund and Trendhedge Fund returned 4.15%, 1.10% and 4.81%, respectively, bringing their year-to-date returns to 11.37%, 5.89% and -2.23%. The three products manage a combine $402.1 million in total assets.

“August appears to have been one of the worst months ever for the hedge fund industry, and almost all investment styles performed poorly,” noted Niederhoffer, in his investor letter. “Unlike most of the industry, which recorded large losses in the first two weeks of the month and then recovered somewhat by month-end, our profits were generated during the first two weeks of August when volatility peaked.”

Niederhoffer added that his products’ strong performances “demonstrates the effectiveness of our strategy as a source of portfolio diversification in difficult periods for hedge funds (even other quant funds) and CTAs.”"

http://www.finalternatives.com/node/2493

 

LOL. Its pretty easy for someone with his mindset to hedge this sort of a position. He hedged himself perfectly by using OPM. If things go his way, he gets to make a ton of money for himself. If the outcome is not so rosy, he simply walks away from the mess to go play squash for another five years - just like the last time.

 

oh man, that is a rough post -

 

I am not sure but I read somewhere that almost half of the money (or considerable amount) in the fund was Vic's own.

 

One of the most interesting mathematical tidbits about these higher moments is that they have almost no (zero ?) sensitivity to volatility and time.

Until we know what VN position was, we won't know what he did "wrong". To me the most interesting thing will be if he had been doing the same thing for years, and then the black swan got him. Or, did he just role the dice one time?

I have not read the NY article yet...

nitro

 

Some already know. Some will never know. Some will confuse compound option risk with vanilla risk. It's telling that news of the blowup was posted here six weeks before it broke in mainstream media. What does that tell you of who knows what?

 

Wasn't meant to be.


An oversized 'Short Puts, Long Futures' position CANNOT simply be attributed to an 'error of market judgement'.

Cheers.