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Behind the Market Swoon: The Herdlike Behavior of Computerized Trading

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Re: Behind the Market Swoon: The Herdlike Behavior of Computerized Trading

#31

Post by JumpCrisscross »

hendzen wrote: post #27
JumpCrisscross wrote: post #26

Earlier quoted context omitted.

> Many (if not most) quantitative hedge funds are dollar neutral Delta neutral. And this is very difficult (and expensive) to attain in real life. Most funds are long biased because it's cheaper to be long than short.

No - dollar neutral. Delta neutral is an entirely separate concept. I'm talking about equities trading (or potentially total return swaps) not options or other derivatives. Why do you think its so difficult and expensive to attain? What do you think institutional borrow costs are? And I'm not talking about Interactive Brokers... I'd wager that most funds are long biased because its more difficult to generate short al…

Stock borrow is expensive. More problematically, dollar neutral doesn’t necessarily mean beta neutral (which is the same thing as delta neutral with respect to a broad-market index).

Re: Behind the Market Swoon: The Herdlike Behavior of Computerized Trading

#32

Post by vasco »

kingkawn wrote: post #12
hendzen wrote: post #8

Many (if not most) quantitative hedge funds are dollar neutral, which means they have one dollar short for every dollar long. There are typically additional constraints about having equal long/short exposure on each industry and investing style (momentum, value, etc). So contrary to the article, most of these funds don’t take broad bets for or against the market. What they are really doing is correcting the relative…

How does that not result in a net neutral investment return? Forgive my ignorance if this answer is obvious

To expand on pmalynin's excellent answer with an example:

Imagine you think Apple is better than any other technology company and you want to bet it will outperform other technology companies. If you simply buy Apple stock, you might lose money even if it outperforms all other tech companies, in the case that the whole market is going down. Because of the above, you need to devise a strategy that will earn you money on the difference between Apple stock and the overall tech sector stocks. Those strategies usually involve combinations of stock and derivatives and you can optimize your returns vs exposure with simple models.

Re: Behind the Market Swoon: The Herdlike Behavior of Computerized Trading

#33

Post by hendzen »

JumpCrisscross wrote: post #31
hendzen wrote: post #27

Earlier quoted context omitted.

No - dollar neutral. Delta neutral is an entirely separate concept. I'm talking about equities trading (or potentially total return swaps) not options or other derivatives. Why do you think its so difficult and expensive to attain? What do you think institutional borrow costs are? And I'm not talking about Interactive Brokers... I'd wager that most funds are long biased because its more difficult to generate short al…

Stock borrow is expensive. More problematically, dollar neutral doesn’t necessarily mean beta neutral (which is the same thing as delta neutral with respect to a broad-market index).

Sure, I alluded to the concept of beta neutral when I mentioned 'additional constraints' - dollar neutral was a simpler concept I used for a non-finance audience. I've never heard anybody use the term delta neutral outside of derivatives trading.

For the vast majority of symbols, stock borrow is cheap at institutional size.

Re: Behind the Market Swoon: The Herdlike Behavior of Computerized Trading

#34

Post by rayvy »

lordnacho wrote: post #30

Former fund manager here. Yes, there is herdlike behaviour. But why? Here's a little story about my investment career. I once hired a guy for a fund I was partner in. He was a proper old school equity investor. He'd fly around the world to different countries and visit businesses. He'd think about each country's prospects, each industry, and each company. He'd meet withe the CEOs and look them in the eye, and ask the…

> Yes, there is herdlike behaviour. But why?

> People, and computers which learn what worked for people in the recent past, have gone from a rich market conversation about many things to one about just QE.

So are you saying that in the past N years since QE and 0 rates, the parameters that define which assets/resources to buy/trade have gone from wide-ranging (e.g., "We'd think about different countries, their bonds, their IR rates, swaptions, etc"), to singular (e.g., "...has become a conversation only containing rates.") ?

How does this tie back into the "herd-like behavior" comment? Are you saying that every algo trader is only focusing on rates because that (more so than anything else), is determining where to allocate capital?

Re: Behind the Market Swoon: The Herdlike Behavior of Computerized Trading

#35

Post by lordnacho »

rayvy wrote: post #34
lordnacho wrote: post #30

Former fund manager here. Yes, there is herdlike behaviour. But why? Here's a little story about my investment career. I once hired a guy for a fund I was partner in. He was a proper old school equity investor. He'd fly around the world to different countries and visit businesses. He'd think about each country's prospects, each industry, and each company. He'd meet withe the CEOs and look them in the eye, and ask the…

> Yes, there is herdlike behaviour. But why? > People, and computers which learn what worked for people in the recent past, have gone from a rich market conversation about many things to one about just QE. So are you saying that in the past N years since QE and 0 rates, the parameters that define which assets/resources to buy/trade have gone from wide-ranging (e.g., "We'd think about different countries, their bonds,…

I doubt that all algos are looking at the stream of interest rates. It's hard to know since these things are mostly private.

But they can herd into factors specific to their markets that are nonetheless still the same thing, due to rates causing behaviour everywhere.

Re: Behind the Market Swoon: The Herdlike Behavior of Computerized Trading

#36

Post by benj111 »

lordnacho wrote: post #30

Former fund manager here. Yes, there is herdlike behaviour. But why? Here's a little story about my investment career. I once hired a guy for a fund I was partner in. He was a proper old school equity investor. He'd fly around the world to different countries and visit businesses. He'd think about each country's prospects, each industry, and each company. He'd meet withe the CEOs and look them in the eye, and ask the…

Interesting.

I assume because financing is less than inflation?

Wouldn't you still have the same relative tradeoffs? Bonds lower yielding, but more liquid. Stocks riskier etc.

Re: Behind the Market Swoon: The Herdlike Behavior of Computerized Trading

#37

Post by jm__87 »

ajross wrote: post #29
jm__87 wrote: post #22

Earlier quoted context omitted.

Not really sure what your point is. Cycles always happen for the same technical reason - more buyers than sellers lead to rising prices and more sellers than buyers lead to falling prices. Understanding what leads to these imbalances in buying and selling is the more interesting and more difficult part and the details tend to be a bit different for every cycle. Most people find these details interesting and for some…

> Not really sure what your point is. Cycles always happen for the same technical reason Pretty sure that was exactly my point. I'm sure someone finds the behavior "interesting", but if the same thing is happening for the same reason, I'm arguing those details that everyone finds "interesting" aren't "important".

Okay, well I think we disagree then. Most people who follow the markets know that markets are cyclical, but knowing if you're in the beginning, middle or end of the upswing or downswing portion of the cycle is what most people care about. Knowing the details are the only way you could even have a chance of correctly making these calls.

Re: Behind the Market Swoon: The Herdlike Behavior of Computerized Trading

#38

Post by ajross »

jm__87 wrote: post #37
ajross wrote: post #29

Earlier quoted context omitted.

> Not really sure what your point is. Cycles always happen for the same technical reason Pretty sure that was exactly my point. I'm sure someone finds the behavior "interesting", but if the same thing is happening for the same reason, I'm arguing those details that everyone finds "interesting" aren't "important".

Okay, well I think we disagree then. Most people who follow the markets know that markets are cyclical, but knowing if you're in the beginning, middle or end of the upswing or downswing portion of the cycle is what most people care about. Knowing the details are the only way you could even have a chance of correctly making these calls.

> Knowing the details are the only way you could even have a chance of correctly making these calls.

That's voodoo thinking. "OK, all those other times everyone was wrong about this. But this time we have new jargon, so we can figure it out!"

Nothing in the linked article (or anywhere else) gives you the magic you want. This is just a new way of explaining long-settled ideas.

This is like trying to debug a linked list bug via disassembly. "OK, fine, it was a bug before on x86, but look, now it's compiled for RISC-V and uses entirely different register schemes, so this time it will work!"

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