Goldman Sachs, on Monday, made the announcement that the markets had been anticipating. The banking giant said that three of its hedge funds had sold huge equity positions following the recent stock market woes and it appears that other quant funds are in a similar position. Hedge Fund Research's EMN index had lost 7.6% by last Thursday and probably saw more loses in Fridays plunge.
Basically they way EMN make money is that they take long positions in shares that they expect to to do well in the market and take short positions in those they expect to do badly. The programmes are set by the managers of the fund based on many different criteria. They plug in the programme press that 'go' button and churn out profits. At least in theory.
Billions of dollars have flowed into the EMN funds because it is the closest thing to being in the market with no risk, they have been seen as investment vehicles that couldn't make a loss, one of the leading fund of hedge fund manager talking to The Times said "People know now that that's not true"
I know of a hedge fund manager who was in the quant business before it became all the rage and I remember going into his office during some other market turmoil and he told me that the fund was down 20% in the last month. I asked him why they were executing the trades that the computer was pumping out (it wasn't automatic then) when they were obviously, even from a basic trading perspective, wrong. His answer then is probably the same as people are getting now from EMN managers. He said "Its either a computerised trading system, or its not, we will find out in the next few weeks if it knows what it is doing". Sure enough in the following two months, the system made 33%.
By their very nature, quant systems have to operate in liquid markets, because you can't expect a computer to wait for a trade, so the quant funds, I believe will have some short term problems, but will inevitably recover. Where the problem lies is in those funds who are in more illiquid situations, derivatives etc, where margin calls are going to be increased.
As shares fall (or rise if you are short) then you have a choice if you are the wrong side, anti up extra margin with your leverage providers or start getting out of the market and off-loading positions. The problem is that you are now not necessarily second guessing the market itself, you are second guessing your fellow hedge funds.
If you stay and he off loads, you are in trouble. The safest way, you would think, would be to swallow your losses and not get wiped out. Unfortunately this creates a run for the exits and with it, big problems for the markets.
The thing is, however, the guys that run the big hedge funds are not stupid people who are swayed by the vagarities of the markets. These are smart, well connected people who know what they are doing. They have made money by taking risks and in any period of market instability there are huge profits to made for someone... We know Goldman have taking their hands of the 'touch a truck' hedge fund competition...who will be the winner? Now if I knew that, it would make a great article for this blog...
Basically they way EMN make money is that they take long positions in shares that they expect to to do well in the market and take short positions in those they expect to do badly. The programmes are set by the managers of the fund based on many different criteria. They plug in the programme press that 'go' button and churn out profits. At least in theory.
Billions of dollars have flowed into the EMN funds because it is the closest thing to being in the market with no risk, they have been seen as investment vehicles that couldn't make a loss, one of the leading fund of hedge fund manager talking to The Times said "People know now that that's not true"
I know of a hedge fund manager who was in the quant business before it became all the rage and I remember going into his office during some other market turmoil and he told me that the fund was down 20% in the last month. I asked him why they were executing the trades that the computer was pumping out (it wasn't automatic then) when they were obviously, even from a basic trading perspective, wrong. His answer then is probably the same as people are getting now from EMN managers. He said "Its either a computerised trading system, or its not, we will find out in the next few weeks if it knows what it is doing". Sure enough in the following two months, the system made 33%.
By their very nature, quant systems have to operate in liquid markets, because you can't expect a computer to wait for a trade, so the quant funds, I believe will have some short term problems, but will inevitably recover. Where the problem lies is in those funds who are in more illiquid situations, derivatives etc, where margin calls are going to be increased.
As shares fall (or rise if you are short) then you have a choice if you are the wrong side, anti up extra margin with your leverage providers or start getting out of the market and off-loading positions. The problem is that you are now not necessarily second guessing the market itself, you are second guessing your fellow hedge funds.
If you stay and he off loads, you are in trouble. The safest way, you would think, would be to swallow your losses and not get wiped out. Unfortunately this creates a run for the exits and with it, big problems for the markets.
The thing is, however, the guys that run the big hedge funds are not stupid people who are swayed by the vagarities of the markets. These are smart, well connected people who know what they are doing. They have made money by taking risks and in any period of market instability there are huge profits to made for someone... We know Goldman have taking their hands of the 'touch a truck' hedge fund competition...who will be the winner? Now if I knew that, it would make a great article for this blog...
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