Tuesday, August 14, 2007

An Autopsy

Here are my observations on the recent, errrr ..... hiccup (?) in quant-land (note for the squeamish that the photo is of an "Autopsy Dummy", available by mail order for those parents looking for an out-pf-the-ordinary gift for their pre-med inspired offspring):

1. Obviously some folks puked in July. You know who you are (either because it is YOU, or because YOU are an investor), so there is no need to repeat the roll-call here.

2. The usual suspects (as in the past) are "Macro-oriented Multi-Strats", de-leveraging, probably as a result of losses elsewhere (replay of same old song).

3. As is apparent to all, others vomited positions sympathetically, either because they panicked, they were told to, they had to as a result of external forces, or because of some type of stop loss.

4. It is unlikely that IBs predated funds since they all have rather large similar positions of their own.

5. Smallcap value got hit the worst , providing an eye-opening wake-up call to principals, risk-managers, and portfolio managers alike as to the true potential cost of trading this type of inventory in the modern age of limited dedicated liquidity provision. (Truc du chef: when grilling Quant PMs insure you ask them about the cost of liquidation during times of others liquidating. Any single digit whole number percentage estimate should be viewed with suspicion).

6. "Short-interest" IS a fine proxy for pari-passu risk. Anal-retentive types can have some confidence in piecing together competitors' portfolios with quarterly 13F-HRs, the absence of positions within these disclosures, and published short-interest even with the poor granularity, data quality and omissions.

7. The biggest contributor to out-sized (and yes, unprecedented) moves, in my opinion, was NEITHER the size of unwinding of positions, NOR the pari-passu or its concentration (though young 'uns who got spanked should take note), but the fact that the quantitative & stat-arb communities are the dominant liquidity providers in the US equity markets. It was their withdrawal from providing liquidity, exacerbated by mimetic liquidation and prevailing market structure that made it seem so bad. Likewise, when the news was "out", and rumour was fact, and demands for liquidity reversed direction, so too were the liquidity-providers absent permitting the similar magnitude reversal on Fri and Monday.

8. We all have known that (like US energy policy) US equity market structure is fragmented and sucks. One couldn't have designed such a byzantine order even if that were one's expressed objective. We know that specialists are the scum of the earth having been granted monopoly front-running privileges (which they pursue in earnest), and that, in their place, the new breed of liquidity provider (DEShaw, Two-Sigma, Citadel, Tykhe, Highbridge, and the IBs) are purely discretionary in their dedication and application of capital. This should serve to heighten awareness of what it might cost to "get-out", and lead EVERY participant to qualify any answer regarding the cost of trading, and b y extension the value of "mark-to-market" in general, and the cynicism and discounts that an investor may wish to attribute to such values ascribed to holdings by agent-managers.

9. Lots of Capital remains deployed in relative value long vs. Short strategies. Short-interest remains asymmetrically high on the tails of this deployment in aggregate, particularly i "expensive" thematic high-growth, high-earnings momentum situations. On the long-side a reasonable amount remains dedicated to smaller-cap and value-biased situations that en-masse, have a higher-sensitivity to market-wide earnings . Some of the recent poor performance is related to exposure to this "spread" and the market herd's current preference for earnings stability and growth "at any price" rather than suffer the humiliation (and pain) of the long-side higher-probability earnings torpedoes. This is a secular preference of the market and will diminish only with evolution of new macro info.

10. SO: We've large dislocation. Large reversal. Some cuts, scrapes, and bruised egos. But being back where we started, I cannot help but think the conditions that led to "the event" remain: excessive leverage in a deteriorating credit and risk-appetite environment, high- pari-passu, shitty market structure, uncertain behaviour in respect to stomaching losses, and portfolio assymetries that have the potential to continue to yield negatively skewed risk vs. reward in the short-term. Look for some backfill as participants look to take advantage of the bounce to reduce leverage further.

11. Last but not least: Four-dollars of long position and four dollars of short position short per dollar of equity?!?! These guys really are either extremely stupid, or have a cigarette-smoking like death wish. I am not going to preach and moralize about it, but IF during "normal" times, one is carrying the kind of gearing, it simply leaves no margin for error in the event of the unforeseen, and as I have said before "Sometimes shit just happens...". I guess there are still somethings that a PhD at Stanford, MIT or UChicago cannot teach you....


Anonymous said...

Down the road, the whole episode of the last few years kind of taints a whole large data set with the investigating officer's fingerprints, doncha think?

"Cassandra" said...

I dissuade all from data-mining, though it is difficult to fully escape all tinges of data-snooping. For example, even though I demand all potential strategies to "make sense" (i.e. NOT be too divergent) both behaviourally or financially, "what makes sense" itself is already tainted by future information. This alone should make one and all suspicious of the world-class idiot savants with PhDs who havn't had their his hides handed to them by tail events, from the get-go. I put to you that it remains an art form and not a science - at least in part - and that even the best PhDs are best harnessed when tethered to practitioners with sufficient cynicism and awareness to bridge the gaps between stats, the workbench, and reality.

Anonymous said...

The issues of risk assesement go even deeper than quants, stats, workbench etc . . .

What do I mean?

A study published in June 05 in the journal Psychological Science found that emotionally impaired people are more willing to pursue aggressive growth investing strategies. Researchers asked 41 people with normal IQs to play a simple investment game. Fifteen of the group had suffered lesions on the areas of the brain that affect emotions.

The result? Those with brain damage outperformed those without. The scientists found that emotions led some subjects to avoid risks, even when the potential benefits far outweighed the losses.

Antione Bechara, an associate professor of neurology at the University of Iowa, says the best investors are those able to feel no emotions while trading. He called such investors "functional psychopaths."


Anonymous said...

Nonetheless, one can imagine the niggling doubts about seeded drill samples that cores extracted from the hardwired trading bedrock (sorry, it just jumped up and got hold of me. Sick bags are available from your shift supervisor.) are going to present to future prospectors - at least until its forgotten.

pi - I remember that, but were they the best when whatever it was stopped working? Or were they doing it all to eventually get 'caught', as is a little typical?


Anonymous said...

The Japanese housewives have spoken. "We don't like your Yankee dollars." My ouija board says 108-109 then to 100.


Anonymous said...



情趣用品,A片,AIO,AV,AV女優,A漫,免費A片,日本AV,寄情築園小遊戲,情色貼圖,色情小說,情色文學,色情,色情遊戲,一葉情貼圖片區,色情網站,色情影片,微風成人, 嘟嘟成人網,成人,成人貼圖,18成人,成人影城,成人圖片,成人影片,UT聊天室,聊天室,豆豆聊天室,尋夢園聊天室,080聊天室,080苗栗人聊天室,080視訊聊天室,視訊聊天室



麻將,台灣彩卷,六合彩開獎號碼,運動彩卷,六合彩,遊戲,線上遊戲,cs online,搓麻將,矽谷麻將,明星三缺一, 橘子町,麻將大悶鍋,台客麻將,公博,game,,中華職棒,麗的線上小遊戲,國士無雙麻將,麻將館,賭博遊戲,威力彩,威力彩開獎號碼,龍龍運動網,史萊姆,史萊姆好玩遊戲,史萊姆第一個家,史萊姆好玩遊戲區,樂透彩開獎號碼,遊戲天堂,天堂,好玩遊戲,遊戲基地,無料遊戲王,好玩遊戲區,麻將遊戲,好玩遊戲區,小遊戲,電玩快打

麻將,台灣彩卷,六合彩開獎號碼,運動彩卷,六合彩,線上遊戲,矽谷麻將,明星3缺一,橘子町,麻將大悶鍋,台客麻將,公博,game,,中華職棒,麗的線上小遊戲,國士無雙麻將,麻將館,賭博遊戲,威力彩,威力彩開獎號碼,龍龍運動網,史萊姆,史萊姆好玩遊戲,史萊姆第一個家,史萊姆好玩遊戲區,樂透彩開獎號碼,遊戲天堂,好玩遊戲,遊戲基地,無料遊戲王,好玩遊戲區,麻將遊戲,好玩遊戲區,小遊戲,遊戲區,電玩快打,cs online

情趣用品,情趣,A片,AIO,AV,AV女優,A漫,免費A片,情色,情色貼圖,色情小說,情色文學,色情,寄情竹園小遊戲,色情遊戲,AIO交友愛情館,色情影片,情趣內衣,情趣睡衣,性感睡衣,情趣商品,微風成人,嘟嘟成人網,成人,18成人,成人影城,成人圖片,成人貼圖,成人圖片區,UT聊天室,聊天室,豆豆聊天室 ,哈啦聊天室,尋夢園聊天室,聊天室尋夢園,080苗栗人聊天室,080聊天室,視訊交友網,視訊

Anonymous said...

百家乐 轮盘 21点 德州扑克 百家乐系统 真人娱乐场 百家乐足球德州扑克 电子游戏 英格兰超级联赛 德国甲组联赛 意大利甲组联赛西班牙甲组联赛法国甲组联赛欧冠杯 英超 足球比分 足球彩票 体育彩票 即时比分 免費a片 a片 免費av 色情影片 情色 情色網 色情網站 色情 成人網成人圖片成人影片 18成人 av av女優 avav女優 情慾 走光 做愛 sex H漫 情色 情趣用品 情色 a片 a片 成人網站 成人影片 情趣用品 情趣用品アダルトアダルト アダルトサイト アダルトサイト 情趣用品