Questions about credit spreads!!! Help me!

Discussion in 'Options' started by zunonline, Jul 21, 2013.

  1. Maverick74


    Actually, you are right about that. And I guess we need to break funds down into more categories. You are right that very large funds have no incentive to kill their golden egg. But I also don't believe they are necessarily buying convexity either. They are more often then not in the more conservative buy and hold crowd with less leverage. Perhaps their "convexity" is coming from the private equity space.

    But smaller funds are NOT making anything on their 2%. They need to generate returns and most will bleed to death if they are waiting for a long gamma bet to pay off.

    Bankers however get no such management fee. They get to earn a cut of their p&l if they are right and lose nothing if they are wrong. Truly the most blessed among us. :)
    #61     Jul 25, 2013
  2. sle


    Given the demands for convexity coming from hedgers, smaller fund are not making a dent there. With S&P at all-time highs, where do you think 10y S&P variance swap? 27 @ 28. Somehow, nobody is selling it.

    No true. For a trader at a bank, "management fee" is the value of the seat. If you are in the right seat, money just sticks to your hands - a corporate trade (ASR or a CB hedge) here or there, pension fund flow, insurance company comes to buy var etc.

    If you stick around, you get paid something nice though not "incredible". You just have to be at or over your P&L budget while balancing against a fairly tight set of risk limits. On the other hand, if you blow up you get canned and, chances are, you'd never get another trading job. Extreme upside is capped, plus, as a line trader, you only really get paid "tons" if (a) you made a f*ckload of money (b) your firm made a f*ckload of money and (c) the street as a whole made a f*ckload of money.

    PS. I think the reality of what happend in 2008 escapes the public - the key cause was not the malicious selfishness, but rather stupidity and complacency. People like Taleb perpetuate that myth because it serves well their cause (Robin Hood style B/S).
    #62     Jul 25, 2013
  3. newwurldmn


    The hedging community is like 10x the size of the vol community.

    When I was trading flow, I would get long short funds who would spend 2MM on puts to hedge against earnings. For them it was 10bps of their fund. For me, it represented potential death. This was constant.

    And then much of the vol community can't be short convexity (banks, and many multi-manager funds like citadel and millenium) don't allow vol desks to be short a lot of convexity. At my firm it was the principle risk measurement - gap 10 and gap 20.
    #63     Jul 25, 2013
  4. A very interesting idea. Is there a good book/information resource about this?

    Would this mean that you better try to center your strategy on "stuff around the mean" and cancel out the tails?
    #64     Jul 28, 2013