Its got nothing to do with liquidity or "gambling" per se. The world in which we live in is full of gambles/risk/ probabilities. For example: 1- marrying one person over the other in the hopes that you'll be in a happier, more rewarding relationship, 2- knowing when to cross the street at the right time to decrease your probability of getting hit by a vehicle, 3- choosing one job with an employer over the other to increase your probablilty of making more money, room for advancement, etc. , 4- choosing the right speed driving on a highway to get to your destination quicker without overly increasing your probability of getting into an accident. ...in summary: its a matter of knowing how to gauge and manage RISK. And the only way to excel in managing risk is thru experience and learning from your mistakes.
Based on this analogy it is not even sensible to invest (no leverage) in the market. The annualised return of the market (DJIA) over the last century had been about 10%, and with max drawdown of 90% during the depression, the sharpe ratio is abysmal. Is that what you mean?
I do not think the traders are blind to the risk, they just pretend that their models did not see the risk. This scam was observed noted and magnified by the mortgage lending scam which wall street and Euro bankers used to pillage treasuries all over the western world. Note how it followed ltcm and neiderhoffer. Our models did not forsee the risk? Models were not used to make money they were used for deniablility.
Partly. The stock market is certainly a terrible risk-adjusted absolute return vehicle by itself. However, as part of a diversified portfolio, it works just fine. For example, a portfolio of 50% long stocks, 25% gold, 25% long-term treasuries, held up reasonably in the Great Depression. The stock portion lost 40% but gold and government bonds increased substantially, leading to a maximum drawdown of less than 20%, in the worst market event in US history. Reinvesting dividends and treasury coupons, the 5 year return from 1929-1934 was positive. So, it still makes sense to invest in the market. It just doesn't make sense to go 100% long stocks, and then lose 90% if the market falls 90% again. Better to be 50% long stocks, and 50% long uncorrelated or inversely correlated assets. You make less most years, but your long-run returns are still good because of avoiding total disasters, and thanks to the benefits of rebalancing.
with a ton of OPM you can just average into anything you want and eventually make money. And when it ends up going against you, then you hear about funds blowing up. Pretty easy. It's much easier for fund managers than for individual traders. Plus, when the funds blow up, the managers still get paid so they don't really care.
Even better, when their current fund is so far below the high water mark that it looks like they'll never be able to charge more fees they simply close it and start a new one. The word 'shameless' doesn't even come close.
Unless u close up shop when u hit your expected max drawdown at some point you are going to have to put money at risk again, and when u do this you could aggravate the drawdown before things turn around. (assuming they eventually do).
Hi, You are making a lot of assumptions. One that I question is that the drawdowns are even viewed by the manager as excessive. For a fund manager performance is often all about how they are doing compared to the market, so from a fund manager's perspective, I think the maximum expected drawdown is less than or equal to whatever the market drawdown happens to be. If the fund lost 49% and the market lost 50%, then from a fund manager's perspective, they are ahead. At least that's how I think many see it. Don
I don't see how your conclusion follows. Maximum expected drawdown is just that - the actual peak to trough drawdown in any given case is known only in hindsight, and could be more, less, or exactly on target. There's no iron law of the universe that the market can't take the best, most highly-skilled trader in the world and drain his account to zero, at whatever rate is permitted by maximum daily/weekly/monthly loss limits.
You are assuming a) a fluid market with no gap downs b) perfectly liquid market conditions where the liquidation of a position doesn't cause further deterioration of your own risk parameters, forcing you to liquidate more Treating stop prices on all positions as a guarantee for a certain max DD is unrealistic to begin with. Any trader who tells his clients they won't be at risk of losing more than X% is either lying or doesn't know what he's talking about. Or both.