Posts tagged with hedge funds

It’s true that the financial sector enjoyed disproportionate rents but it’s not true that the smartest and brightest work there. …[T]he place is littered with failed scientists. Worse, it’s littered with idiot savants. There are once in a while people working there who have trained for the job — Very good PhDs in finance and economics, for example, or good M&A lawyers, and they usually strike me as the ones who offer the best contributions to their organizations.


cf, Eric Falkenstein


Follow-up: Herbalife $HLF hasn’t dropped yet. I wonder what the time frame for Bill Ackman’s shorts was?
(Did I mention I got google ads from Pershing arguing the short position?)

Follow-up: Herbalife $HLF hasn’t dropped yet. I wonder what the time frame for Bill Ackman’s shorts was?

(Did I mention I got google ads from Pershing arguing the short position?)


Whilst reading John Hempton’s post on shorting $HLF I decided to follow along in quantmod.

Long story short, HerbaLife sells weight-loss supplements through a multilayer marketing business model which Bill Ackman contends is an unsustainable, illegal pyramid scheme. Ackman calls it “the only billion-dollar brand no-one’s ever heard of” and Hempton posts some very unflattering Craigslist marketing adverts:




thus undermining its credibility.

I should mention that I got some internet ads from Pershing Square Capital Management when I googled for herbalife information. In other words the shorts are spreading the word around to the common man to jump on this short! Destroy this pyramid scheme! You could read this as similar to a penny-stock email, but I view it simply as credible self-interest: I already put my shorts on for what I believe are rational reasons. It’s obviously in my self-interest to convince you to do the same but I do in fact believe that $HLF will and should go down and you know I do because I put my money where my mouth is. Whether that’s an ideal confluence of honesty, moral high ground, and selfishness—capitalism at its best—or some overpowerful hedgies using their marketing dollars to bring down a solid company, I’ll leave up to you.


Anyway, on to the quantmod stuff.

Here’s how to generate the 2007–present view:


require(quantmod); getSymbols('HLF'); setDefaults(chartSeries, up.col="gold", dn.col="#2255aa", color.vol=FALSE); chartSeries(HLF)

Now here’s the interesting part.

(…”Ackman” should read “Einhorn” in red there…)

You can notice in red that trades per day (volume) have risen to 10, 20 times normal levels during 2013—which maybe we can attribute to the “buzz” generated by Pershing Square, @KidDynamite, Bronte Capital, and whoever else is calling $HLF a pyramid scheme.

median(Vo(HLF)) tells me the halfway split between “high” and “low” trading volume for this stock. It’s roughly 2 million trades per day. Then with quantmod I can plot those hi-lo subsets with chartSeries(subset(HLF, Vo(HLF)<2e6)); chartSeries(subset(HLF, Vo(HLF)>2e6)) to get a visual on “calm days” versus “heavy days”. That’s something you can’t do with Google Charts.

Here’s calm (under 2 million trades/day)


upper half of heavy trading days (over 2 million/day)


and what I’ll call “pirate days” (over 10 million trades/day)—with plunderers swarming the stock, battling with swords between their teeth


wherein it’s visually clear that very heavy trading skewed blue over gold—i.e. $HLF closed lower than it opened on that day: the heavy trading volume was taking the price downward.

But more precisely what happened on those days? This is a good job for the stem-and-leaf plot. Notice, by the way, that reality here looks nothing like a bell curve. Sorry, pet peeve. Anyway here is the stem plot of heavy trading days:

> hi.volume <- subset(HLF, Vo(HLF)>1e7)
> stem(Cl(hi.volume)-Op(hi.volume))

  The decimal point is at the |

  -14 | 1
  -12 | 
  -10 | 
   -8 | 2
   -6 | 1554
   -4 | 542
   -2 | 430
   -0 | 988761851
    0 | 345667780388
    2 | 058699
    4 | 1
    6 | 5

I love stem plots because they give you precision and the general picture at once. From the way the ink lies you get the same pic as the kernel density plot( density( Cl(hi.volume) - Op(hi.volume) ), col="#333333" , ylab="", main="Volume at least 10 million $HLF", yaxt="n", xlab="Price Movement over the Trading Day"); polygon( density( Cl(hi.volume) - Op(hi.volume) ), col="#333333", border="#333333" )
but you can also see actual numbers in the stem plot. For example the ones to the right of +0 are pretty interesting. Slight gains on many of those pirate days, but not enough to bash back a 14-point loss on a single day.

Jim Simons, a hedge fund manager, to the US Congress: “Most culpable [for the crisis of 2008], in my opinion, were the ratings agencies.”

  • "Our strategies are usually contrarian."
  • "Medallion Fund is almost entirely employee-owned."
  • "We charge ourselves fees."
  • 'In my view hedge funds were not a major contributor to the [crisis of 2008]. Generally [they] have increased liquidity and reduced volatility in the markets.”
  • "Each hedge fund’s leverage is controlled by its lenders."
  • He’s in favour of more financial regulation.



In May the Financial Times reported that Derwent Capital, the hedge fund that partnered with Johan Bollen and Huina Mao to trade the “Twitter Predictor” Strategy “shut down”. The official story is that Derwent’s Capital Markets’ Absolute Return fund opened for investments in July 2011, and…The official story is that Derwent’s Capital Markets’ Absolute Return fund opened for investments in July 2011, and shuttered after a single month, with reported returns of 1.86%.

There are a few oddities here:

  1. Why is the FT reporting in May 2012 that a hedge fund closed in August 2011?1 It would seem this is no longer news. To confirm this is not an error on the part of the Financial Times, I quote a ‘weekly sentiment email’ sent by Derwent Capital on June 6, 2012: “Some of you may have read about our Hedge Fund closing last year in press articles this week.” What? I just caught up on the news of this ‘moon landing’, and now you’re telling me there are more events happening in the world?
  2. As late as the end of March 2012, Derwent was posting performance numbers for managed accounts on their webpage. The reported performance was generally positive, but not consistent, with the spectacular performance promised by Johan Bollen. This period of Derwent’s existence has gone down the memory hole.

You can follow @shabbychef on twitter as well.

Last week @gappy3000 shared the Bank of International Settlements’ autumn 2011 assessment of the impact of high-frequency trading on foreign exchange (currency) markets.

For the lazy, here’s a summary of the executive summary:

HFT in FX operates on high volume but small order sizes, low margins, low latency (… milliseconds) and short risk holding periods (… well under five seconds). …[I]t occurs mainly in the most liquid currencies.

Market functioning: HFT[’s] impact on … FX market[s] … could be seen as beneficial in normal times. HFT helps to distribute liquidity across the decentralised market, improving efficiency, and has narrowed spreads…. Questions remain about HFT[s’] … willingness to provide liquidity … under [stressed] market conditions. … That said, recent experience  suggests that HFT participants are not … flightier than traditional participants in times of market stress….

Systemic risks: The 6 May 2010 “flash crash” in equities suggests that systemic risk is … more likely to be triggered by a “rogue” algorithmic trade than by pure HFT, which tends to involve small-size trades, short horizons and diverse strategies. Nonetheless, HFT may … propagate shocks initiated elsewhere….
Market integrity and competition: Many of the “predatory” or “unfair” practices attributed to HFT participants … are in fact not new. HFT is but the latest high-tech, high-speed manifestation of them.


market makers are normally paranoid that the other side of the trade “knows” what is going on and that it is a pickoff.

as a market maker, you think “what can i do against this that makes sense?” so you look for a vertical or 1×2, for example. or if there is nothing, then “how much i am going to bleed out of you in order to make [this] worth the risk?”

nuclear phynance user apine


Most people think that day-traders don’t add economic value. The NuclearPhynance traders’ phorum might change their minds. Those [economists] whose idea of finance = prices converging efficiently upon a "true" value due to a kind of value-investor who also sells short—might see in apine’s words a different story. Financial markets can be more like a discussion between people who don’t necessarily know what’s going on, but try to figure that out based on what everyone else is saying.

For those who don’t understand what “liquidity" means to a trader: it means a market maker who is willing to get scraped up in a scary environment. Liquidity sometimes means a market maker (sometimes: a high-frequency trader) who is willing to play on a muddy pitch and not even charge much for the trouble.

A boxer expends much energy avoiding punches, even if they’re only feints.


With the the increasing availability of complicated alternative investment strategies to both retail and institutional investors, and the broad availability of financial data, an engaging debate about performance analysis and evaluation is as important as ever. There won’t be one right answer delivered in these metrics and charts. What there will be is an accretion of evidence, organized to assist a decision maker in answering a specific question that is pertinent to the decision at hand.
Performance Analytics R package
(by Brian G. Peterson & Peter Carl) 

[A] strong case can be made for the [random walk hypothesis]… This market view is supported by the fact that the vast majority of mutual funds fail to beat the broader market year after year, and history shows us that the ten best-performing funds in any one year will drop to the bottom of the pack in the following two to four years…. Simply put, there is no way to consistently beat the market.

Needless to say, this view of things does not sit well with Wall Street, which preaches that … relying on expertise are the keys to investing (and their business model!)….

[A]lthough the random walk theory paints a strong case against mutual funds, it is not entirely bullet-proof. Investors consistently fall prey to fear, envy, overconfidence, faddism, and other recognizably human imperfections that make markets not only inefficient but predictably inefficient…. If the DOW goes up one week, it is more likely to go up the next week. In the long run all of these moves smooth themselves out, but in the short run, predicting and trading these constant adjustments can actually make for quite a profitable proposition.

Agustin Silvani, Beat the Forex Dealer

What I’m hearing—not for the first time by a trader writing a book—is the implication that the way to consistently make money as a trader is to make the market more efficient, more stable.

If I were running a company based on this asset, I would be thanking the trader who stabilized my business decision. Is that what happens when these guys run longs and shorts all year long?

“What I have learned about the hedge fund business is that I hate it.” 

I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck….. What is the point? They will all be forgotten in fifty years anyway.

—Andrew Lahde, who bet against subprime and made over 800% returns

He got to say “I told you so”. He got to be an underdog. And he got  O( 10,000,000 ) dollars.

Also — he concludes with a plug for legalizing hemp “while he has everyone’s attention”.