I am thinking that simply trading long and short on a lot of instruments, systematically, will keep you quasi hedged but on the right side of the markets in the case of a disaster. This might relate to this work somehow: http://noosphere.princeton.edu/terror.html I was testing systems, pretty much mean reversion in nature, at the time of 9/11, trading NASD issues and I was net short going into that day. I really do think that the markets know a bit more than we give them credit for.
A thank you for this...."they can't eat you" http://www.bobparsons.com/index.php?/archives/120-guid.html really excellent article
Yeah, right! And you also have the colossal ignorance to dis Warren Buffet... does your mother know you're accessing the internet? "But Warren has only matched the stock market last 10 years. Buffett is, first and foremost, a carefully constructed cult." http://www.elitetrader.com/vb/showthread.php?s=&postid=1091417#post1091417 I have news for you Johnny Jackass... Buffet's returned 22% compounded annually for 40 years. And you're not fit to be a hemorrhoid on his anus. http://www.forbes.com/lists/2005/54/C0R3.html
Spending 6 figures in development of trading software, obviously you must have a fairly deep pocket before commencing your trading business.
You say its not a challenge, but then you go on to say: This sounds like the epitome of a challenge to me. What you suggest is a very interesting extension of pairs-trading to baskets in an industry. It would be a huge challenge to sort the 60-70 REITs in a way that puts 20 in the long basket (i.e., those with upside reversion/movement potential) and 20 in short basket (i.e., those with downside reversion/movement potential) while keeping the two baskets nicely balanced with regard to interest rate exposure, geographic region, and office/commercial/residential category exposure. Very tricky. This seems easier to me as long as the fraction of variance of price movement in the prime trade is relatively constant with respect to the hedged variable. E.g., if interest rate fluctuations explain 20% of the variance of price movement of my tradable, then I might take a small hedge position in something that is more directly tied to interest rate movements (e.g., an instrument tied to bonds). I disagree that its an intentional directional play because I'm making no assumptions about whether the hedge will go up or down. I'm only hedging to remove variance due to some financial variable (e.g. interest rates or forex) that my system doesn't track. At best you could argue that every hedge is an unintentional directional play because the short side of the hedge only adds profit when the short-side instrument drops in price. But I say this is really unintentional because if you knew the short side was going to drop, then you could trade it all by itself. I agree with you that hedging is a way to reduce portfolio variability. I see hedging as an explicit admission of ignorance about the direction of some element of price movement. It is a way to remove risks (both potential profits and losses) associated with parts of the price movement that I have insufficient knowledge about. Thus the point of hedging is to avoid making a directional play by cancelling out directional moves that one has no ability to predict.
I would be extremely careful trading REITs in a long/short basket. There is likely to be lots of mergers in this sector now and the risks of long/short have gone through the roof. nitro
Life is not easy when you have no class "Mister 666"... But your behavior far exceeds the ET Terms of Service. YOU ARE HURTING ET'S BUSINESS AND IT WON'T LAST. You can do grade school math... But lack the basic logic skills to put it together. first 30 years at 26% last 10 years at 11% = 22% over 40 years What WB did in the 60s has no relevance in the year 2006. He has only matched the stock market the last 10 years. That would make him yesterday's man... But, first and foremost, WB is a carefully constructed cult.
This is what I mean by "issues indigenous to that class of securities". With REITS you have many: Mergers, dividend increases/cuts, specialized REITS like health or hotel, earnings surprises, etc, etc. The #1 thing an experienced trader does is AVOID BIG LOSSES... And it takes a few years to experience and learn every conceivable REIT pitfall... And develop systems to optimize REIT trading. Anything off-the-shelf would be seriously sub-optimal. Personally, I could be trading REITS in a week... And a 6 month learning curve would lead to fairly optimal hedging. But I already track 400 securities and have my hands full. I just used REITS as a good example of a homogenous universe... But if I was expanding... this group might be #3 or #4 on my list.