I’m very pleased to present our first guest blogger to this space – Scott Johnston. Scott’s an experienced hedge fund exec who’s currently a PM and principal at the
Belstar Group, an asset allocator and fund-of-funds. This post has been excerpted, with permission, from his monthly newsletter. Contact him at sjohnston {AT} belstargroup [DOT] com.
The biggest single impediment I see for investors contemplating an investment into hedge funds is “blow up” risk. How can they think otherwise, with all the hype? The media enjoy little more than the self-immolation of a hedge fund – Rich Guys Get Theirs! Blow-ups score a 10 on the CNBC schadenfreude scale. (Note: for institutional investors, blow up risk translates more specifically into “headline risk,” which is basically the risk of losing one’s job if a hedge fund you invested in ends up in the papers for the wrong reason.)
How common are hedge fund blow-ups? How often do they happen? What do they do to returns? These are questions I wanted to get to the bottom of.
Fishing around, I found surprisingly little research on the subject, so I thought it might be useful to conduct a survey of our own. Specifically, we will look at hedge fund blow-ups through the years to see what kind of conclusions we can draw. For the sake of argument, we will call anything greater than a 50% loss a blow-up.
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I came across this article on a Go-playing program and thought it was interesting. Particularly this aspect of it (from wikipedia):
One major alternative to using hand-coded knowledge and searches is the use of Monte-Carlo methods. This is done by generating a list of potential moves, and for each move playing out thousands of games at random on the resulting board. The move which leads to the best set of random games for the current player is chosen as the best move. The advantage of this technique is that it requires very little domain knowledge or expert input, the tradeoff being increased memory and processor requirements.
Our algorithmic trading platform, StratBox, features a unique strategy component model that supports the modular development and re-use of “pieces” - we call them StratParts – of a quantitative trading strategy. StratParts expose metadata which can be manipulated by a human or software agent (e.g., a trader, an optimizer, a regime-switching protocol). A StratPart might be an entire strategy, a risk management component, a graphical or reporting component or really whatever a trader might envision. StratParts can be composed within the StratBox GUI to create a strategy which can be tested, analyzed and executed. Naturally, users can create their own StratParts which integrate seamlessly with the environment. Read more…
He didn’t look like much, but old Rocky Marciano put his back into every awkward punch he threw. More remarkably, he remains the only heavyweight champion to have ever been smart enough to get out of the game on top. He was that rarest of characters – a winner who knew when to engage and when to step away.
I’ve written a good deal about losers and ideas that might not yield the results one’s looking (hoping) for, but I haven’t written too much about life’s winners. This, of course, is absolutely par for the course amongst traders. People aren’t in the habit of giving away trade secrets, leaving sums of money on the sidewalk or revealing their trading strategies. When they do (or claim to) is likely a good time to keep an especially watchful eye on your possessions…
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Although we’ve been in business since 2005, we’re still something of a start-up and certainly an entrepreneurial entity, so when a VC friend of mine suggested checking-out meetup.com‘s technology and business groups I was open to the idea. This past week I attended my second meeting of the “ny tech” group and was as impressed the second time around as the first. It’s quite a production – from the venue, to the organization, to the ideas, people and products being presented – all for $5! (Though they sadly announced a price increase to $10 starting next meeting.) If you have even a small inclination towards entrepreneurial ventures or emerging technologies, it’s well worth a look-see.
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