The New Math: Quantitative hedge funds are pressing into new realms of science

SH_DW · Apr 13, 2008

The following from Mark Brown is quite true! You have quite a bit of insight in the matter.. from EXPERIENCE, no doubt!!

An intraday trader must be able to DO WHAT IS NECESSARY w/o limits on their thinking and must also have incredible PATIENCE!

Mark Brown on the reasons some intraday traders succeed..

"I believe there are a few reasons why some make it.

1. They start in a position to not need to make a living from it. The
need for steady money like a weekly paycheck will corrupt your thinking and
force you to deviate from your plan of action that was so well thought out
prior to the heat of the battle.

2. They do not need the money that they loose. The enormous amounts of
money that it requires to learn to daytrade would exceed most people's
lifetime income. What makes the number of successful daytraders so low is
that even the few who could make it, dont have enough capital to endure the
learning curve.

3. They do not give a flying _uck about anything or anyones opinions of
what the market will or might do. The very news and opinions that surround
them becomes the mortar for their brick wall of defense that protects their
completely independent thinking.

4. They do not follow the crowd, and there is no pressure on them to
conform or perform. One absolutely must not be in a position to be held
responsible for anything that you do. Total freedom from both personal and
monetary obligations are a MUST, this alone eliminates 99.9%.

5. They have incredible discipline to not buckle under pressure. They have
a perfectly clear head and understand fully what they do and how they do it.
Battle wounds and memories of defeat are more valuable to them than the
money.

6. They do not daytrade with the goal of making money. Quite the
opposite, they would be just as happy in any type of intellectual challenge
that requires the extraordinary inverted thinking and brilliance required to
win at an individualized sport.

Mark Brown"

ashatet · Apr 14, 2008

I think this fool better work on solving the energy crisis, let us see if he can figure that out rather than waste efforts on a zero sum game...

Quote from makloda:

27 Mar 2008

Nick Rockel

Smarting from last summerâs huge losses, quantitative hedge funds are pressing into new realms of science in an effort to prosper during the ongoing credit crisis.

Page 1 of 6 | Single Page

For a man whose flagship hedge fund is running on fumes, Marek Fludzinski couldnât be calmer. The founder and CEO of New Yorkâbased Thales Fund Management has watched his firmâs assets plummet by more than $1 billion during the past year, as Thales, like most quantitative managers, has suffered as a result of the global credit crisis that began last summer. But Fludzinski, who has a Ph.D. in theoretical physics from Princeton University and was one of the first two dozen employees at famed quant shop D.E. Shaw Group, is on a mission that means far more to him than profit and loss. He believes science is the key to unlocking the inner workings of the markets, and he intends to devote significant resources to prove it.

âI think there is a law tying everything together,â says Fludzinski, 52.

Science, however, didnât much help Fludzinski last summer, when the onset of the credit crunch shook Thales and other quantitative hedge funds. Many of these firms specialize in a computer-powered strategy called statistical arbitrage, which uses mathematical models to profit from tiny mispricings of stocks and other assets. But in early August their models faltered after a large manager decided to liquidate its equity portfolio, most likely to meet margin calls on its credit positions. Partly because their strategies are based on many of the same academic theories, quant firms like AQR Capital Management, Renaissance Technologies Corp., D.E. Shaw and Thales held some of the same positions and began racking up huge losses. Sucker punched by the market, the quants didnât know whether to cash out or stay in. Fludzinski and his peers came off like a bunch of propeller heads who had naively tried to bend reality to their models.

This isnât the first time Fludzinski has run into trouble. In 2002, Thales fell about 10 percent, say investors, prompting some to flee. This go-around, in a more difficult market, Fludzinski found ways to stem the losses. âWe had enough of a risk control program in place that we werenât forced to liquidate for margin calls despite our leverage,â he says. âWe had layers of option strategies on top of our stat arb strategies to protect them from this catastrophic risk.â

Yet even those risk controls didnât save Thales from finishing 2007 down some 10 percent, according to investors, some of whom pulled their money. The fund, which despite its struggles has delivered an annualized return of 10 percent since its 1999 inception, began this year with just $400 million in assets.

This calamity wasnât supposed to befall the quants, who are among the brightest people working in finance. During the past several years, managers and investors have flocked to their strategies, drawn by the promise of outsize returns and undersize risks. The dean of the quants is James Simons, founder of Renaissance, a publicity-shy firm based in East Setauket, New York. Renaissanceâs $7.5 billion Medallion Fund has posted a 39 percent annualized return â after its hefty 5 percent management fee and 44 percent performance fee â since its 1988 inception. But even Simons, who has a Ph.D. in mathematics from the University of California, Berkeley, and once worked as a code breaker for the U.S. Department of Defense, was caught unawares by the August downdraft.

In hindsight, last summerâs series of unfortunate events should not have been completely unexpected. Nine years earlier a global credit squeeze, which began when Russia defaulted on its ruble-denominated bonds, felled hedge fund Long-Term Capital Management, whose star-studded quant team included Nobel Prizeâwinning economists Robert Merton and Myron Scholes. But even the smartest managers seem to have underestimated the magnitude and speed of last Augustâs meltdown.

âTheyâre all looking at their models and trying to get an understanding of which ones did worse and which ones did well,â says Andrew Lo, a finance professor at the MIT Sloan School of Management. âAnd theyâre probably looking at various alternatives to try to forecast these kinds of dislocations in the future.â Lo is co-founder of Alpha_Simplex Group, a Cambridge, Massachusettsâbased quant firm with some $550 million in assets (see box).

Quant shops arenât sitting around idly. They are pressing into new realms of computational finance, applying concepts from molecular physics, mathematical linguistics, artificial intelligence and other scientific disciplines. Thales, for example, is using computer simulations to replicate human behavior to try to predict the myriad decisions that drive trading activity. Other firms are pinning their hopes on machine learning â statistical methods that allow computers to identify relationships in financial data and make predictions from them. But regardless of the approach, managers agree that quant funds have been far too focused on equities and need to find ways to apply their strategies to a broader range of asset classes.

âItâs important to cast your net as wide as possible, because you never know what youâre going to find,â says Dimitri Sogoloff, president and CEO of New Yorkâbased quant shop Horton Point. âAnd if you find something, rest assured that sooner or later itâs going to stop working.â

Most quantitative strategies are designed to be market neutral â that is, to deliver positive returns irrespective of what happens to the broader market. Given the amount of borrowed capital that such strategies typically use â before August it was common for a statistical arbitrage fund to be ten times leveraged â the residual damage from last summer could have been worse. Most of the big quant firms have, in fact, bounced back. According to Chicago-based Hedge Fund Research, equity market-neutral and statistical arbitrage strategies finished 2007 up 5.8 percent and 9.1 percent, respectively. Meanwhile, the HFRI fund weighted composite index climbed 10.4 percent.

More: http://www.alphamagazine.com/Article.aspx?ArticleID=1897101
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SH_DW · Apr 14, 2008

I AGREE! HE should "get out of this losing game" +leave the gravy for ME [+of course YOU too!]!!

Quote from ashatet:

I think this fool better work on solving the energy crisis, let us see if he can figure that out rather than waste efforts on a zero sum game...
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The New Math: Quantitative hedge funds are pressing into new realms of science

SH_DW

ashatet

SH_DW