ヴェリアンアレン ヘッジファンド 代替投資 对冲基金 對沖基金

Saturday

High frequency investor

High frequency investor? We all live in a short term world so NO-ONE is a long term investor. Get used to it. Time horizons inevitably shorten. Adapt or die. We must invest appropriately to survive in this era of constant change and disruptive innovation. There is no long term. Only a volatile sequence of very short terms and violent regime shifts to which portfolios must adjust. Or your WILL lose every cent.

Buy and hold is suicide. Securities that appear now to be a buy may change to be an obvious short sell a second from "now". Don't like that? That is the reality we must all operate in. Every industry, every walk of life, every business, every person has to accept that truth. Either embrace high frequency decision making and immediate operational pivots in EVERYTHING you do or get out of the way.

The best long term returns come from good short term strategies. My preferred holding period is forever but it's rarely feasible and never optimal. A substantial allocation to HFT is mandatory. Vested interests fear what they don't understand so they badmouth HFT. Unlike them I fear losing money so invest in NEW sources of return. HFT is lower risk than low frequency trading. High frequency traders MADE MONEY in 2008 unlike the LFT crowd.

Invest across the holding period continuum. LFT doesn't diversify enough so everyone needs HFT. New time horizon alphas reduce portfolio risk. Low frequency trader Warren Buffett has massively underperformed high frequency trader Jim Simons. MODERNIZE your "modern" portfolio.

Why bet it all on LFT but avoid HFT and its superior returns. I have not yet seen even one explicit institutional allocation to HFT or on any 401(k) menu option. I made my first investments in the "new strategy" of high frequency trading in 1990s. Been grateful for the performance ever since.

Passive fans can scoff but high frequency strategies are ideal holdings for retirees, widows and orphans. Performance is very consistent. Many managers carry zero risk overnight. Time horizon diversification is mandatory. Markets are self-similar in all fractal scales. It's SAFER to hold a stock for milliseconds than decades despite what "experts" say. HFT offers better returns at lower risk.

Moving from glacial milliseconds in execution latency to microseconds was inevitable but now people are using nanoseconds. That's GREAT for conservative investors like me. Light takes a nanosecond to travel from this screen to your eyes. Much longer for my pathetic non-silicon brain to process and act on the information. I'm simply not quick or smart enough to compete these days so I let the machines decide.

No surprise most humans are BAD at investing when they are slow and emotional. Picoseconds next? At least Planck time and Einstein's light speed constraint put a physical ceiling on how quick trading will ultimately get. With co-location competition, the time arbitrage arms race is reaching its zenith which puts the emphasis on developing intellectual property.

Best hedge fund for the next decade? The chances are that fund does not yet exist though I met with some good start-ups recently. What about the top strategy? That has also likely yet to be invented. Some trends are certain like growth of alpha capture industry AUM from the currently tiny $2 trillion to at least $20 trillion.

To hedge or not to hedge? Ten years ago today I presented at a conference on "whether" institutions should invest in skill-based strategies. The key takeaways from gurus also speaking then were that investors didn't need hedge funds since "cheap" passive index funds were bringing in +20% a year and could be "assumed" to return +10% over the "long" term.

Fundamental and quantitative analysis were a waste of time as was paying the "cost" of hedging. Transaction costs and electronic trading didn't matter because you should just buy and hold. Be satisfied with "market" returns? Asset allocation was risk management!

What market returns? Instead I prefer absolute returns. Apart from public markets are "efficient" and there is no such thing as investment skill(!) as it is simply random luck, I heard other dubious "facts" from the experts:

1) the apotheosis of high risk buy and hold to its exalted and unjustified status
2) hedge fund capacity was "limited" and $1 billion was "too large" AUM for one firm
3) "high" 1 and 20 fees were "certain" to drop. They are now typically 2 and 20
4) after a weak 1999, CTAs, global macro, vol arb and short sellers were "finished"
5) private equity and real estate returns are "independent" of the stock market
6) short term trading "didn't work" and was "unnecessary" for long term investors
7) liquid equities in major markets were "always" efficiently priced so no alpha!

Those ideas were woefully wrong and I told them so at the time. High frequency trading went on to be the best performing strategy in the 2000s. Long term performance doesn't require a long term holding period. Most people in high frequency until a few years ago were good but copycat rookies are crowding into an area they think they have the expertise to compete. This creates more trading opportunities and greater AUM capacity for the best players. Contrary to theory, the more liquid and number of participants the more INEFFICIENTLY and WRONGLY priced securities become. Irrationality does not cancel out so there are more anomalies and mispricings than ever before. Alpha is abundant but the skill to find it is rare.

The evolution to very short holding periods is the inevitable progression of Grinhold and Kahn's Fundamental Law of Active Management equation: IR=IC.TC.SQRT(breadth). Translating the formula, if you have an investment edge then apply it as often and as widely as possible. The transfer coefficient is how efficiently active bets can be implemented and lower trading costs helps increase that. Breadth is the number of securities to which you can apply that edge. Stocks, bonds, currencies and commodities all have GROWING numbers of liquid securities suitable for HFT.

The more skilled bets you can make the better the information ratio. Active managers deliver the MOST value to clients by trading as many securities as FREQUENTLY as their competitive advantage allows provided they have talent, excellent execution and are UNCONSTRAINED as to longs AND shorts and what they are mandated to do. Hire managers to make money how they see fit not to just give you unhedged exposure to the ups and DOWNS of an asset class. The move to high frequency is simply the natural and logical progression of investment technology.

Absolute returns are spendable cash unlike in the relative return universe. Higher frequency of investment decisions matters. We know from failed investment policies that rebalanced beta asset allocation is not sufficiently reliable if you seek to fund future retirement liabilities. What works is the dynamic triple alpha process of ongoing portfolio structuring, strategy selection and manager due diligence. We might not exist were it not for the triple alpha of nuclear fusion and the chances are portfolios will not perform over the long term without skill fusion. Real ultra low latency high frequency execution: it takes less than 200 attoseconds for the triple alpha process to complete.

Technical analysis supposedly doesn't work so fund managers use semantic arbitrage and refer to it as pattern recognition instead. The seminal studies are correct: publicly disclosed technical indicators and "charting" methods are useless. However proprietary predictive black box models and artificial intelligence systems continue to perform outstandingly as many quantitative hedge funds have demonstrated over the long term.

Despite being considered "new", temporal arbitrage has been utilized for centuries. There is nothing modern about exploiting time advantages. Didn't the Nathan Rothschild credit hedge fund make money out of slower investors in 1814 with early news of the Battle of Waterloo outcome? He short sold consol war bonds, the CDSs of the day, then went long and short squeezed the crowd the tried to follow him. Munehisa Honma's managed futures CTA hedge fund back in 1753 constructed a high frequency data transmission and execution platform by stationing village runners as information conduits from where rice was traded to where it was grown. Momentum, mean-reversion, trend following and statistical arbitrage have been around a long time and work on numerous time frames.

Samurai trading: the time between the decision to trade and executing that trade must be minimized. The quicker and better you are at information gathering and analysis then the higher the performance. The edge in high frequency is often slippage minimization and better transaction technology. Robo-traders and bid offer spread capture blurs the line between market makers and market takers. The fractal nature of markets means that the main constraint on capturing opportunities from microstructure and macrostructure were trading costs which continue to fall. Long term = investing, short term = speculation or vice versa? Buy and hold for years or milliseconds? They are structurally isomorphic with time the only variable but the LONGER you hold a security the MORE risk you take. Ask General Motors and Japan Airlines buy and holders about that. There are no blue chips, anywhere.

There is still plenty of money to be made out of the unskilled in high frequency strategies and capacity is expanding rapidly. Very liquid ETFs like SPY, QQQQ, EEM, IWM, UNG, EWJ and XLF already have most of their volume from shorter term strategies. Foreign exchange, the E-minis and KOSPI futures are probably the best equity trading vehicles on the planet and being the most liquid are of course the most wrongly priced which creates a lot of alpha opportunities for talented traders. FX offers a vast range of alpha capture opportunities as do the more liquid bond and commodity futures. The more liquid the more alpha available.

When you buy a security you might hope to hold the stock for decades or the bond to maturity but the reality is that a short term outlook is usually necessary for risk management. Commodities and currencies are fantastic for trading but never for buy and hold. Long only commodities is one of the oddest ideas out there. Long/short commodities should be core in any portfolio. The many gold bulls might recollect that GLD remains mired in a six hundred year old BEAR market and nowadays there are more sophisticated and lower tracking error ways available of hedging inflation or for difficult times.

There is a strange populist idea circulating that short term trading serves no economic purpose. The investors that DID allocate to high frequency are today better funded than those that concentrated solely on long term stocks and bonds. Alpha always has superior risk-adjusted returns than beta. Surely added liquidity is good for everyone. Those markets that heavily tax trading or ban short selling have deeper drawdowns and higher volatility than those that do not. Investors gain from lower transaction and slippage costs. The events of 2008 would have been worse were it not for the liquidity provided by automated and systematic traders. If you MUST make a fire-sale during a crash, the presence of buyers is essential. High turnover of a portfolio isn't bad and is often essential to control risk.

Whether carbon-based or silicon-based, sapient entities of all kinds can succeed in quantitative short term investing if they work hard enough and spend many years building core expertise in the hard sciences without the luxury of a steady salary. Get fluent in C++, Java, Matlab, Mathematica and building an ultra low latency execution and market impact minimization infrastructure and anyone can be an HFT player provided you are also better than 99% of the other people trying to do it. A cheaper and quicker way for most is to hire a skilled manager to do all this for you.

The returns can be high but the cost of getting good are very high. Hidden Markov models, speech recognition and compressed sensing can help determine the probability of near future moves when you have methods to analyze recent history and are able to identify order embedded in assumed randomness. Sparsity of data is an occupational hazard in the prediction of financial markets but tick data provides large information sets to detect hidden structure. Hidden to the ridiculous random walk ranters that is.

Low frequency managers need to invest for years before we can be sure it wasn't luck. The more trades you do, the shorter the track record needs to be to demonstrate skill. Rightly or wrongly the world increasingly functions on short term factors. Therefore as an investor you have the choice of fighting the trend or accepting the high frequency attention span of most market participants and mainstream media. We live in a Twitter world where what is hot today is not tomorrow. Stock trading is already a level playing field. Algorithmic execution systems are arbitraged by better algos.

Flash orders and sniper, guerilla or ninja algorithms are available to anyone prepared to pay the high price of access, hardware and software development costs. Dark pools lose out to darker pools. This also creates opportunity for long term investors that have the ability to find good securities amid the fluctuations. Make money from the volatility (HFT) or through the volatility (LFT)? Both but one firm cannot be good at everything which is why broad manager diversification is necessary.

There are very few long term winning securities and price predictability declines sharply with time horizon. Consistently accurate forecasting is extremely difficult but investing with a 30 millisecond outlook has more probability of success than 30 years. Amazingly brilliant are the clever clairvoyants that "know" the stock market will "definitely" be higher in 2040 than today. Wish I also had a time machine that could look ahead that far. Considering the 1910-1940 and 1810-1840 eras I wonder why they are so confident this time around. They must know something I don't.

You need 10,000 dedicated hours to get good at something. To get basically competent at investing probably takes 10,000 separate trades or at least the thorough analysis and due diligence of 10,000 different investment ideas. As a researcher at Renaissance Technologies recently noted, "We try to find these very obscure patterns hidden in a lot of noise". There is also a vast amount of noise in portfolio construction and fund selection but one signal is clear. Strategy diversification with many different managers whose holding periods range from femtoseconds to decades.

The solution for consistent capital growth at low volatility already exists and investors need high frequency trading strategies if they want good risk-adjusted returns EVERY year. High frequency trading is a must for every portfolio. Skill based spatial and temporal alpha is the way to go.

By Hedge Fund Creative Commons License

This work is licensed under the Creative Commons Full Attribution, Non-Commercial, No Derivative Works 3.0 License

Hedge Fund Hedge fund

ヘッジファンド

F u n d §©®±¼½¾µßαβγδσ€∂√∞≠♠♣♥♦ΣΦΨΩ Follow Me on Pinterest