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"A wise American hedge fund manager once said..." | quant trading clips

[NO CRYING IN THE CASINO @TheQuantClips]

The appraisal ratio test:
AQR's Managing Director Peter Hecht

"To me, the most potent thing is to actually calculate alpha relative to their current opportunity set, which is the portfolio they hold."

"By having access to this, do I improve the return of your portfolio without taking more risk?"

"And that can actually be calculated. It's called an appraisal ratio."

"If some theoretical exercise says it has alpha but doesn't improve your portfolio, it's dead to you as far as I'm concerned."

[NO CRYING IN THE CASINO @TheQuantClips]

The strongest alpha can disappear when you size the trade.

Partners at Versor DeWayne Louis and Nishant Gurnani explain:

"So in EM markets in general, in EM equity index futures, there isn't as much liquidity, so we don't run as much risk in EM markets as we do in developed."

"We run 12 developed on a cross-sectional basis, 12 EM on a cross-sectional basis."

"oftentimes the alpha signals will be strongest in these less liquid, smaller markets."

"that alpha is sort of a mirage because you can't actually trade those markets in, in the level of size and volume you want without moving the prices meaningfully."

"And so the key insight is incorporating a very thoughtful portfolio construction process that takes into account tra-transaction costs and liquidity in real time to, to account for, for the position sizes you take in these markets."

[NO CRYING IN THE CASINO @TheQuantClips]

Idiot one year, genius the next:
Balyasny's founder Dmitry Balyasny

"And the allocator might say, well, yeah, that's fine. But this other fund that trades equities and macro, they're up 35 percent."

"And then you'd look at what they were doing, and they're 80 percent directional and super concentrated and have a ton of beta."

"Then you come in the next year and the market was down 20 percent, that same fund is down 30 percent and hopefully you're up 12, and then you look like a genius. But you're doing the same thing that you were doing the previous year when you looked like an idiot."

"So we try to just stick to the knitting and put up consistent returns, as opposed to being overly influenced that at the moment the market's exuberant, next month it's depressed."

[Ethan Kho @ethanrkho]

Ex-Goldman Oil Derivatives Trader Simran Singh (@0xturbanurban) on the day oil went to -$37.63, why every trading strategy is momentum or mean reversion, & losing $3.12M in a single day.

Simran Singh (Goldman Sachs oil derivatives trader, on the desk when WTI went negative | GSR Head of DeFi Trading | Now CEO & co-founder of @MonacoTrading)

"You can't touch an interest rate curve, but you can smell a barrel of oil."

We cover:
- Pricing oil options at 300-400% vol the day WTI went negative
- How Goldman's oil desk monetizes client flow (80-85% was producers hedging)
- How producer hedges turned a market-risk problem into a credit problem in 2020
- Why market making is really a bet on mean reversion
- The perp funding trade: anyone can do it, very few can do it in size (15% carry even on the CME)
- "My size your price, or your size my price"
- Who's printing money right now: OTC hedging in power, compute & AI
- Why there's no venue to trade electricity, and how Monaco wants to fix that

Highlights:
00:00 Intro
00:58 The day oil went negative: April 2020
06:07 How Goldman oil traders monetize client flow
18:30 Every strategy is momentum or mean reversion
22:53 Goldman to GSR
28:26 The perp funding trade
34:48 Sell-side to buy-side
42:27 The AI complex & agentic trading
48:21 The Monaco Exchange thesis
53:13 Decentralizing futures listings

[NO CRYING IN THE CASINO @TheQuantClips]

Seeing short squeezes coming:
Citadel Securities' Technology COO Jeff Maurone

"How do we see short squeezes coming before it's too late? We get these questions all the time from our clients."

"If you look at retail flows in equities and you look at retail flows in options and then you look at institutional short interest, there's enormous predictive signal around when an event like this could happen."

"Rather than fulfilling data requests, we pre-compute these every day."

"Breakout probability fuses all of these data into a view that gives investors every single day the likelihood of a short squeeze in a given symbol. We do it for every symbol, we do it every day."

"Avis faced a short squeeze earlier this year."

"If you were paying attention to this tool, you clearly knew this was coming weeks in advance, and if you were particularly concerned about it, you could have known it months in advance to prepare."

[NO CRYING IN THE CASINO @TheQuantClips]

The AI trade gets discerning:
Citadel's CEO Ken Griffin

"Look, I think this market is actually experiencing people doing research."

"Which companies in that story are choke points in supply chains that will have abnormally high margins?"

"But in some sense, I'm just going to buy them all. I'm going to buy the hyperscalers. I'm going to buy the chip companies. I'm going to buy businesses that make things I've never even heard of five years ago in Korea and Taiwan and Japan."

"And now, we're reaching a point where people are becoming more discerning."

"We do realize that we are seeing extremely high margins in DRAM and MLCCs, in areas where there are real supply constraints, but people are now starting to look out two years, three years: how long is this going to last?"

[NO CRYING IN THE CASINO @TheQuantClips]

AI's margin fork:
Balyasny's founder Dmitry Balyasny

"At the moment, while AI is making us much more productive and efficient, we haven't let go of one person because AI has automated their job. We're just hiring more AI people."

"But if you look out five years from now, is that still going to be the case? Probably not. Some jobs are going to get automated."

"If you think of a typical company where there's a lot of folks doing very bureaucratic type of things, a lot of pretty mundane tasks, all that stuff is gonna be automated. I don't know if it's in a year or in five years, but somewhere in that timeframe."

"If you're a company that can really harness that and you could produce your products, your services at a much lower price point, and you figure that out ahead of the competition, your margins might explode to the upside."

"On the other hand, if everybody in your space is doing that, maybe your margins are actually gonna collapse, because everybody's gonna drive down pricing."

"Everyone is focused very much on the next quarter. But if you think out two, three, four years, how's this space going to look?"

[NO CRYING IN THE CASINO @TheQuantClips]

@brad_D6 No crying in the casino.

[NO CRYING IN THE CASINO @TheQuantClips]

When a position goes against you:
Point72's founder Steve Cohen

"I mean, listen, you gotta keep processing information."

"You gotta remember the way we do things, one stock is part of a bigger portfolio."

"Let's say you own a stock and it's going down, you may have shorts against it, protecting you. We run long, short, we don't necessarily just run long."

"You gotta recheck your work and, you know, make sure that you're not missing something. I mean, you can't know everything."

"And you may want to add if you've done all the work and decide, hey, this is a great opportunity."

[NO CRYING IN THE CASINO @TheQuantClips]

No tracking error, no outperformance:
AQR's Managing Director Peter Hecht

"Tracking error is the volatility, but it's the volatility of the relative return, your return versus a benchmark."

"A tracking error of 3% means, if you think it's a normal distribution, you're going to have a return that's going to be either 3% ahead of the S&P 500 or 3% behind the S&P 500 with roughly a 66% probability."

"If you want to beat the benchmark, if you want to try to add value, you have to take tracking error."

"You can take bad tracking error, right? That's with a manager that does not have a good process for determining what's an attractive security or an unattractive security."

"The more tracking error you take gives you more possibility for beating the benchmark, but it also means you might actually lag the benchmark by more when your manager experiences bad luck."

[NO CRYING IN THE CASINO @TheQuantClips]

@spliffymagoo No crying in the casino.

[NO CRYING IN THE CASINO @TheQuantClips]

AI as an amplifier of human intuition:
Citadel Securities' Technology COO Jeff Maurone

"It's very easy to dismiss them as efficiency gains or operational gains. It's 99% cheaper to produce software."

"When the mindset shift goes from purely automation to starting with a spark of human intuition around what moves markets and amplifying that, magical things are happening."

"Maybe historically, as an analyst covering several hedge funds, you read a few 13F filings to see how holdings changed."

"But now, you might have an agent reading every single 13F filing the moment it comes out, compares with every historical filing in history, builds essentially every portfolio in the market, shocks every portfolio daily and maps the risk across the entire market."

"That amplification of human intuition about the way markets work is the source of alpha here."

"Human intuition is the spark that starts it, and AI and agents amplify it."

[NO CRYING IN THE CASINO @TheQuantClips]

@HedgeFundClips No crying in the casino.

[NO CRYING IN THE CASINO @TheQuantClips]

@internpierre No crying in the casino.

[Ethan Kho @ethanrkho]

Hedge Fund Manager David Orr (@orrdavid) on why he backed a game show winner with no credentials:

"I think that people aren't actually focused on just the simple answer of, like, what's this guy's edge. They're not willing to look outside and pick unusual people."

"In our case, one of our guys won a TV game show."

"He doesn't have any credential at all. He didn't work in any of the big shops or banks or anything."

"I'm fine hiring him because his personal account Sharpe for a few years is two point something, so we'll give him a shot."

"You could be a delivery guy, but if you're killing the market, I'll give you a shot. It could be anybody."

[NO CRYING IN THE CASINO @TheQuantClips]

Quitting trend following at the worst time:
AQR's Managing Director Peter Hecht

"In 08 it actually did well. So that's actually why everyone got in after 08."

"If trend following is based on underreaction to news, if there isn't much news, there is very little to underreact to."

"A lot of people got out of trend following after holding it for 10 years and it was sort of mediocre, and they got out in 2021, and in 2022 the industry was up, let's call it 30% or 40%."

"Sometimes holding it with equity beta is a way to force discipline."

"If you're just holding managed futures standalone and it's just having two, 3% returns, you're sort of like, ah, is that a good use of my capital?"

[NO CRYING IN THE CASINO @TheQuantClips]

Slugging vs. hit rate:
Balyasny's founder Dmitry Balyasny

"If you contrast it with high frequency trading, which is a hit rate type of business, you're going to have 99% of your trades going to be profitable or a tiny loss. You've got to do tiny, tiny, tiny, and repeat, repeat, repeat."

"We have 170 investing teams at the moment. When you hire an investing team, chances are, depending on their track record, maybe 75% of them will wind up working out."

"If you can control the risk, you might lose 10 million, 20 million, 30 million on somebody who doesn't work out, but the ones that do work out, they'll hopefully be with you for 10, 20 plus years, and you might make hundreds and hundreds of millions off of them."

"In order to enable the slugging, you have to have very well-defined risk boxes within which people will operate, to enable them to bet on the things that they're really good at betting on and try to exclude as much of the other stuff as possible."

"For every strategy, we'll have stops, vol targets, vol limits, stress limits, liquidity limits, et cetera."

[NO CRYING IN THE CASINO @TheQuantClips]

Answer every question before it's asked:
Citadel Securities' Technology COO Jeff Maurone

"For 50 years, the process of sequencing amino acids into folded proteins was a bottleneck on biology research."

"Researchers would spend quarters, sometimes years, folding just a single protein until Demis Hassabis and the team at DeepMind fundamentally changed this."

"Using models, they reduced that process from years to call it six or seven weeks."

"Even though they were using a model to accelerate the process, it still worked first in, first out."

"Instead of working that way, why not just fold every single protein we've ever seen?"

"More than 200 million proteins folded, became an incredible resource that changed biology forever."

"Using what is essentially an early form of agents, rather than answer questions when they arise, but to preemptively answer every possible question before it is asked, is one of the real emerging ways that we are seeing AI and agents being used to achieve incredible results."

[NO CRYING IN THE CASINO @TheQuantClips]

AI and the holding-horizon problem:
Balyasny's founder Dmitry Balyasny

"I don't think you can replace any for the foreseeable future, but I think it's a really good adjunct."

"Markets are quite different. And the longer your holding horizons, the more different they are."

"For that stuff, you can use AI to really automate your trading because the rules are quite clear, like what causes a stock to go up in the next 30 seconds? Well, it's more buyers and sellers."

"But over a longer period of time, is this employment number that comes in hot good or bad for equities? Well, that depends on the environment that you're in."

"When a company misses their earnings number, but the revenues are better, is that good or bad? Well, it depends."

[NO CRYING IN THE CASINO @TheQuantClips]

The 55% hit rate:
AQR's Managing Director Peter Hecht

"In stock selection, the way it ends up working on average is, let's say, if we're right about 55 percent of the time, we hit our target return."

"So that means 45 percent of the time we're wrong."

"Let's say one year we were 52 percent right and we hit our target return."

"Let's say we're having a bad year and you must be like, well, instead of 52%, you must be at 37%. No, we're at 49%."

"The difference between hitting your target return or having a good year versus a bad year, it's small, right? It's a small edge."

"It's not like we're right 80% of the time. It's more like low 50s, mid 50s for our stock."