My life in a hedge fund - Université de Fribourg - Universität ...
Upcoming SlideShare
Loading in...5
×
 

My life in a hedge fund - Université de Fribourg - Universität ...

on

  • 796 views

 

Statistics

Views

Total Views
796
Views on SlideShare
795
Embed Views
1

Actions

Likes
0
Downloads
10
Comments
0

1 Embed 1

http://www.slideshare.net 1

Accessibility

Categories

Upload Details

Uploaded via as Microsoft PowerPoint

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

My life in a hedge fund - Université de Fribourg - Universität ... My life in a hedge fund - Université de Fribourg - Universität ... Presentation Transcript

  • My Life in a Hedge Fund Marc Potters Capital Fund Management
  • What is a Hedge Fund?
    • Traditional Asset Management
      • Long Only
      • Equity (Stocks)
      • Bonds
    • Alternative Investments
      • Real Estate
      • Private Equity
      • Hedge Funds
    • Hedge Funds
      • At least one of the following:
      • Leverage
      • Short Positions
      • Derivatives
      • Profit from Trading
  • Hedge Fund Industry
    • Number of Hedge Funds
      • Total : thousands
      • Assets > 1 billion$: ~100
      • Assets > 10 billion$: ~20
    • Total Amount in Hedge Funds
      • 1 – 1.5 trillion$ (10 12 )
    • Worldwide Stock Market Capitalization
      • ~40 trillion$
    • Short Lifetime
      • Typical lifetime ~ 3y
      • Survival bias
    • Known Quantitative Funds
      • Simmons’ Medallion
      • Prediction Company
        • Farmer and Packard
      • D.E. Shaw
      • Citadel
  • Types of Hedge Funds
    • Long/Short Equity
      • Stock Picking + Short
    • Event Driven
      • Merger
      • Distress
      • Shareholder Activism
    • Convertible Bonds
    • Bond/Yield Arbitrage
      • e.g. LTCM
    • Global Macro
    • Others
      • Complex Derivatives
    • Systematic Quantitative
      • Futures Trading (CTA)
      • Equity Statistical Arbitrage
      • Volatility Arbitrage
      • e.g. CFM
  • Short Selling
    • Buy Shares: Long Position
      • Make money if price goes up
    • Short Selling: Short Position
      • Borrow shares from someone else
      • Sell them on market
      • Need to buy them back at some future time
      • Make money if price goes down
  • Futures Market
    • Market for Finance Professionals
      • Contract size = 50-100k $
    • Many Asset Classes
      • Stock Indices
      • Government Bonds
      • Short Term Interest Rates
      • Currencies
      • Commodities
        • Oil Products
        • Grains + Livestock
        • Metals
    • Symmetric Long/Short
    • Small Deposit
      • 3-5 % of value
    • Marked-to-Market Everyday
    • Anonymous
    • No Counterparty Risk
      • Exchange between every transaction
    • Electronic Almost Everywhere
  • Call Option
    • Right to buy an asset at a fixed price X (Strike) at a later time T (Maturity) for a payment upfront C (Premium).
    • Premium depends on fluctuations (Volatility)
    • Similar to insurance policy
    • Black-Scholes Theory
      • Option premium and hedge under continuous-time multiplicative Browninan motion
      • Unrealistic assumptions
      • Used as an effective theory to translate market prices in volatility
  • Statistical Trading
    • Casino “House”
      • Odd/Even 19/37=51.3%
      • Many tables, many players, many days
    • Hedge Fund
      • Diversify in strategies
      • Diversify in “space”
        • Trade many uncorrelated assets (residuals)
        • Avoid global factors
          • Market mode
          • Global volatility
      • Diversify in time
        • Short term trading
    • Law of Large Numbers
      • Average ~ N
      • Fluctuations ~ √N
  • We’ve got computers…
    • Short Term Trading Opportunities
      • ~100 ms
    • Monitor Large Number of Assets Simultaneously
      • 2000 Stocks
      • 30000 Options
    • Implement Sophisticated Pricing Models
    • Patient
      • Can wait hours to save a few dollars
    • Record Everything They Do
      • Audit
      • Impact Analysis
    • Anonymous
    • No Emotion
    • No Stress
  • Ingredients for a Successful Hedge Fund
    • Investment Strategy
      • Profit generating strategies
        • Predict future prices better than chance
      • Trade selection
        • Risk control
        • Transaction cost analysis
      • Trade Execution
      • Constant Innovation
    • Other Departments
      • IT infrastructure
      • Marketing
      • Back-Office
      • Compliance
  • Predictable Random Walk
    • How can a random walk be predictable?
    • Bias (not equal to risk free rate)
      • Carry trade: buy currency that pays large interest rate
    • Positive Auto-correlation
      • Trend following
    • Negative Auto-correlation
      • Mean reverting
  • Trend Following
    • Strategy
      • Always Long or Short
      • Go long if R(t)>R 0 , go short if R(t)<-R 0 , otherwise stay
    • Make money on average if random walk is persistent
    • Trade statistics is skewed
      • Winning trades are longer than loosing trades
      • Loosing trades are more frequent
    • Daily return statistics is unskewed
      • gauge transformation
  • Risk Control
    • Fat tails
      • Non-Gaussian statistics
    • Leverage Effect
      • Price drops induce volatility
    • Volatility fluctuations
      • Long range autocorrelations
      • Non-trivial kurtosis
      • Dynamical leverage
  • Distribution of Stock Returns
  • Risk Control
    • Empirical Correlation Matrices
      • N assets, T time intervals
      • Q=N/T ~ O(1)
      • Marcenko-Pastur distribution of eigenvalues
      • Small eigenvalues are dangerous for Markowitz
        • w ~ C -1 r
      • Large eigenvalues may be signal
        • Cut-Off cleaning
        • M-P dressing of ansatz distribution
  • Empirical Eigenvalue Distribution
  • Applications of Correlation Matrices
    • Generalized Pair Trading
      • Pair trading: compare a stock with a peer
      • Create a “super-peer” using all correlated stocks
    • Uncorrelated Residuals
      • To get √N diversification need uncorrelated bets
      • Invest uncorrelated portfolios with w a =1
    • Measure Your Risk
      • Need reliable matrix “out-of-sample” if you optimize
  • Transaction Costs
    • Broker – Clearer – Exchange fees
      • Order of 0.1 to 1 bp (10 -5 - 10 -4 )
    • Bid-Ask Spread
      • Order of 1 to 10 bp (10 -4 - 10 -3 )
      • Can do better with smart execution
    • Price Impact
      • Strongly depends on size
      • Dominant cost for large funds
    • Financing cost
      • 0.5 to 1% per year per unit of Leverage
  • Trade Execution
    • Order Book Dynamics
    • Short Term Predictive Models
    • Price Impact
    • Market Reaction
    • Experimental Physics vs Cosmology
  • Quant Crunch 1998 and 2007
    • Aug. 1998
    • LTCM Strategies
      • Emerging Market Yield
      • European Convergence
      • Long Term Index Vol
      • On-the-run Off-the-run
    • Trigger: Russian Dept Crisis
    • Aug. 2007
    • Quant Strategies
      • High Yield Bonds (credit risk)
      • Equity Quantitative
      • Equity Stat Arb
    • Trigger: Sub-Prime Loan Crisis
  • Investment Advices
    • Beware of fees!
    • Don’t buy complicated products
    • Diversify
      • Large portfolio or indices NOT a few stocks
    • Include dividends in your performance analysis
    • Investment managers don’t beat the index
    • Buy Index Funds or ETFs
    • Reasonable long term targets
      • RFR + 3-5% is very good
    • Consider impact of taxes
      • Retirement accounts, life insurance etc.
    • Don’t invest in Hedge Funds
      • Unless you know that
        • They are smart
        • They are not crooks
    • Beware of fees!