Thursday, December 29, 2011

Year Ending

Year ends with trading performances whether fast or slow, algo or guesso, challenged to produce alpha mama. Now there were some standout failures by big name hedge fund managers like Harvard MBA John Paulson. Genius. All that money he made front running mortgage paper with the help of Goldman Sachs is gone and probably any other profits he has made as a manager in the last several years. All those engineered financial derivatives created by the expensive talent in banking and investing on Wall Street are still beating inside the balance sheets of banks and the prime rescuer, the Fed.

There are some positives however. Europe is looking good for a vacation next year. Oh I guess that's it.

The turbulence from volatile swings over this last year has convinced some this kind of action is here to stay. However, rarely has that been true in the over 30 years I have been around markets. The only thing for sure is the action coming in 2012 will be different enough to require trading operations to be vigilant. For most hedge funds, if up does not appear, it will be another disaster for their returns.

Thursday, December 15, 2011

Traders Confounded by Opportunity

Seems hedge funds and trading organizations having trouble dealing with the volatility presented this year. According to an article in Bloomberg, Traders Confounded as Volatility Extends Run, trading has been attacked by too much opportunity.

Here are some of the points;

" Hedge funds are on track to post their second-worst year on record......."

"U.S. mutual funds are headed for their weakest year in two decades......"

"....banks posted their worst quarter in trading and investment banking since the depths of the 2008 financial crisis."

The underlying theme of the article is based on the idea that continued volatility has hurt managers and traders not because of they are not accustomed to volatility events, but the markets have not " established or returned to a medium to long-term trends....". In other words, they have not started going back up. For all the supposed skill claimed over the years by hedge fund types, they are simply bulls, and anything but up does not work.

Another reason for slumping trading skills given in the article is just not volatility, but correlation behavior. All things are moving in lock step, individual company stocks, asset classes, and such. This it is reasoned, does not reflect unique individual values and all things bright and beautiful. There is simply no opportunity to pump and dump.

If things were not bad enough, option traders it seems are having a difficult time because of the cost to finance the implied volatility. The fear of a world financial event has created a bid/offer gap as a result of a liquidity drain driven by price uncertainty. Geez.

Maybe this is all true. But the problem is primarily with the traditional methodology of pricing risk. First of all, market volatility is simply a part of the randomness of price discovery. The options market has always done a terrible job of predicting price moves as represented by the price of a particular strike. The VIX is the greatest example of telling you what just happened. So it is good to remember that option pricing is to pricing risk as brake lights are to forward vision. In the end, it is simply a hedge of chance.

As for increased correlation between asset classes, it is the natural progression of all trading markets. They are all tied together not because they all have the same investment make up but because they all now live at the same address. The proximity of the market maker used to be in the trading pits, next to the broker, next to the other traders. Now it is everywhere and that is forever. All edges are dulled, all information is free, and transaction costs are scant.

Money will find those entities making great returns consistently, in all types of markets. Not just those that eventually go back up.

Thursday, December 8, 2011

Corzine/ Trades Worse Than He Drives

Some idiot Congressman today ask Corzine if he had read the MF mission statement when he first took the job. That kind of fool question is a peek into the mindset of a politician playing to a theme or image of a world they want you to believe is out there. In the fools world Corzine would have responded, " Yes, I read it. And then I prayed about it with my family and we asked for guidance. "

While formulating his actual answer, Corzine was clearly thinking, " Do you think I read it? I am the freaking head of the company not some sh--head who's just walk off the street. Next question."

The important questions will be asked in the discovery process and then repeated in court years from now. But the only important questions for Corzine are rhetorical. Do you really trade worse than you drive? How come all you guys from Goldman keep screwing up so much? I thought you all were so smart?