Hedge fund transparency and barometers - forex trading strategy secrets

Hedge fund transparency and barometers ~ forex trading strategy secrets

Jim Liew of Alpha Quant Club recently posted an interesting article about the increasing demand for transparency of hedge fund strategies by institutional investors, so much so that they are essentially willing to invest only in managed accounts with real-time trades and positions updates. This is, of course, bad for fund managers, since not only can the investor reverse-engineer the simpler strategies from such knowledge, they can also piggy-back on the trades, thus paying a much smaller portion of their profits as performance fee. One might be tempted to think that since the investors are going to reverse-engineer the product anyway, why not just make it as simple and as generic as possible, and charge a much lower fee than the usual 2-20 (which hopefully will attract a much larger investor base), so that the main value to the investor is just convenience and not the originality of the strategy?

In fact, Jim wants to do just that. He proposes to construct hedge fund "barometers", essentially prototypical hedge fund strategies running in managed accounts. This would work well if these barometers have large enough capacities such that the performance can hold up even when a large number of investors sign up. From the investors point of view, this is a trade-off between investing in a truly outstanding, high-performance strategy while paying a large fee and losing "transparency", versus just investing in a generic strategy that may still outperform the broad market. For some institutional investors, this might just be the bargain they are looking for.
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Hedge fund replication - a forex trading system based on a genetic algorithm

Hedge fund replication ~ a forex trading system based on a genetic algorithm

I wrote about how hedge fund returns can be replicated with simple factor models. I just learn that IndexIQ, a company in Rye Brook, NY, has just launched such products available to retail investors as managed accounts.
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Hedge funds move to easy to understand liquid strategies - forex trading system secrets

Hedge funds move to easy to understand liquid strategies ~ forex trading system secrets

See this interesting article (registration required) on FT on the state of the hedge fund industry. Paul Tudor Jones, Citadel, and Fortress Investment Group are all said to be moving to "easy-to-understand liquid strategies", otherwise known as "statistical arbitrage".

(By the way, I have been urging traders to do just that in my book.)
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Are high oil prices due to hedge fund speculation - andrew forex trading system

Are high oil prices due to hedge fund speculation ~ andrew forex trading system

The economist Paul Krugman advances an interesting argument today in the New York Times against the idea that high oil prices are due to hedge fund speculation.

He believes that speculative buying can lead to persistent high prices (which has been the case for the last few years) only if there is physical hoarding. Yet oil inventory level has been normal for this period.

Indeed, I have been trying to find a mean-reverting strategy to trade oil and oil-related assets for some time now. So far, none have outperformed (even on a risk-adjusted basis) just buy-and-hold energy stocks for the long term!


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The social utility of hedge funds - forex trading strategies short term

The social utility of hedge funds ~ forex trading strategies short term

There is an article in the New Yorker magazine profiling Bridgewater Associates, the worlds biggest global macro hedge fund. Inevitably, we come to the awkward question: "If hedge-fund managers are playing a zero-sum game, what is their social utility?"


I thought about this question a lot in the past, and I used to agree with many others that the social utility of hedge funds, or trading in general, is to provide liquidity to the markets. And a good economic case can be made that the more liquid a market is, the higher the utility it is to all participants. However, based on recent experience of flash crash and other unfortunate mishaps, we find out that traders typically do not provide liquidity when it is needed most! So this answer becomes quite unsatisfactory.


In trying to come up with a better reply, I though it is curious that few people asked "What is the purpose of having a Department of Defence?" since wars between nations are typically also zero-sum games, yet we greatly honour those who serve in the armed forces (in contrast to our feelings for hedge fund managers).


To me, clearly the answer with the best moral justification is that, in both cases, there is great social utility in defending either your clients comfortable retirement from financial meltdown (e.g. due to governmental or corporate mismanagement), or in defending your country from foreign aggression. More specifically, the purpose of hedge funds is to reduce long-term volatility in your clients net worth. (I would like to say "reduce risks to your clients net worth", but that would be a bit too optimistic!) 


I emphasize long-term volatility, because of course trading generates a lot of daily or hourly volatility in your clients equity. But I do not believe that such short-term volatility affects ones life goals. On the other hand, a 3-or-more-year drawdown in a typical buy-and-hold portfolio can wreck havoc with many lives.

If one day, the markets become so quiescent that few hedge funds can generate higher Sharpe ratio than a buy-and-hold portfolio (as indeed seems to be the case with the US equities markets these days), then yes, most hedge fund managers should just quit, instead of hogging intellectual resources from our best universities.

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