Point72

in my own case with hot IPOs in the good old tech driven 90s

What was your advantage? Or did you just get lucky?

The simple advantages were as follows: I knew, roughly, whether the issues were hot. I only went for us issues with bulge bracket underwriters who usually held the bid at or above the issue price at the open. I sold at the open on the day the stock started trading.

Oh - and of course I was subscribing direct with the underwriters and got the stock at the issur price.

Haven't played the game in a while but it became a lot more difficult to get stock outside the US.

http://news.morningstar.com/fund-category-returns/long-short-equity/$FOCA$LO.aspx

Long / short ungeared maybe. 6 times leverage. Ouch...eventually. But what do I know....
In any event, a valiant effort.

The argument is that somehow it works, that there is no survivorship bias, that whatever Q has in mind will work, based on the fact that it is established within the industry that it is a path that can be made to work. But then have a look at:

At a gross level, the case doesn't seem very strong. Also, if one sorts on the '5 Year(%)` column, there are a lot of newcomers. Either it is a growth industry, or there is a lot of turnover, due to failures.

Regarding leverage, it is a total mystery to me. I guess the basic formula is that Q would demonstrate (1+r)^n consistent returns, suggestive of a bank CD, and then they'd get some entity to lend them money, to increase the capital level (presumably, the broker makes the loan, but where does the broker get the money?). If things start to deviate too much from the (1+r)^n return, then the lender pulls back his capital. I don't understand this whole thing. If I "lend" $100 to Q for their fund how would this be different from my "investing" $100? I guess if I'm an investor, there is friction preventing me from pulling my money on a dynamic basis, whereas if I'm a lender, as part of the loan agreement, I'd have my hooks into the minute-by-minute status of my portion of the investment, and could add/drop capital per some agreed-upon rules, but since I get to do this, I don't get any of the return stream, I just get to charge fees/interest. Correct?

So, why would 6X leverage be a problem for Q? Would it tend to endanger their 1X capital outlay? I guess the idea is that a "margin call" would be made at an inopportune time? Wouldn't it be the lender who is at risk? Or is the idea that they'd grow the business based on returns from 6X leverage (e.g. headcount, leases, pc's, desks, cubicles, etc.), but if the leverage gets reduced, then they won't be able to pay their bills?

Ha ha yes I also looked at long short equity funds. Re disaster, despite what the talented Mr Fleury might think, black swans usually eventually f**** those who over use it.

Read Nasim Taken....very amusing stuff and his views seem to be born out over time. Over an over again throughout history leverage has usually put a spoke in the wheels.

Survivorship bias probably accounts for those who have not yet blown up.

The usual HF model is to make a packet out of fees and close the fund when it craps out. Then start another one.

There was a lot of fanfare around the announcement of the Quantopian/Point72 relationship formation. They invested $2 M through Point72 Ventures and subject to undisclosed milestones, will start to invest up to $250 M in users' algos. My understanding is that at this point, Quantopian has funded 15 algos, at an average of $100 K each (~ $1.5 M total). Presumably, aside from the accounting, and legal mechanics, there are milestones tied to the consistent real-money performance of said algos, relative to their backtest and simulated live trading periods. I guess it all depends on how much stake one can put into the backtest and simulated live trading data. It seems ideally one would want 2-3 years of real-money data at a relatively low level of capital, before ramping up.

I've tried various angles to see if anyone at Quantopian understands why the multi-factor, long-short approach outlined in the workflow might work, but the argument tends to be "Grant, you are an idiot. This is what everyone does. There are billions invested in this fashion. It'll work, just like it has worked for everyone else, except better." It is called confirmation bias, I think. I'm still totally mystified by the mechanics of a large number of factors combined via computational magic to produce (1+r)^n type returns over decades. It is hard to grasp, intuitively. So, I ask, "Hey, are there any examples out there? Could you show me an existence proof, by running a backtest on Quantopian?" Etc. Reasonable questions, no? Presumably, evidence exists. I've even asked if anyone at Quantopian has seen one of these things first-hand, in action--no response. Very mysterious.

I know it is dull but you might find it helpful to look at hedge funds in general and what they have / have not achieved over the years. I am not knocking Q (far from it) but I do think Nasim Taleb and others have a good point on randomness and survivorship bias.

To quote but a single example - Atradis, once Singapore's biggest hedge fund. The founders walked off with over $100m in fees apparently before they closed the fund down. Apparently they deemed their model no longer profitable.

I can't help wondering whether highly geared long short is picking dimes in front of a steam roller.

Each year some new operation discovers the holy grail...and then investors discover it isn't.

It isn't the long short I quibble over, its the 6x gearing. I would need to study the history of L/S funds to get a really good grip but of course hedge funds are reticent to provide much if any real information.

I think Q are doing a great job on many fronts and I take my hat off to them. I am myself working hard on ML and will post some algos when I am further along the line. I am always prepared to keep an open mind. My cynicism may yet prove unjustified.

Deleted User

Simple quant strategies used to work when there were enough anxious irrational discretionary players in the market. Lately there's a bubble in rationality. Investors have transitioned from full-service brokers to RIAs or robo-advisors, stock picking to indexing, mutual funds to ETFs, etc. If you look at any properly constructed backtest, you see diminishing returns in the past few years. Trying to solve that problem with leverage justified by illusory diversification seems indeed to be a risky path. Once everyone is a quant, there will be no market.

Very good point. I used Kaufman's Efficiency Ratio to look at the alarming decline in trend efficiency in the futures markets over the last 40 years. My findings are given expression by the collapse of JWH and Bill Dunn after decades of successful performance.