Hedge Funds

[KrazyHorse]

44% of profits

[Lawrence of Arabia]

KH comes trying to play with the economists - seems physicists cant do it all.

[One_more_turn]

Barron's publishes hedge fund performance once every quarter, it also sorts them by categories. Hedge fund performance over last 3 years were truly lousy compared to S&P 500. If that continues for another year, we may see significant outflow from hedge funds.

If Barron's stats about hedge funds are representative, then about 50% of hedge funds are equity long/short, 25% statistical arbitrage, and the remaining 25% spread among convertible arbitrage, distressed securities, event driven, global macro, and other more esoteric stuffs.

Arbitrage basically means identifying inefficiencies in the global financial markets and then use large leverage to exploit them. The problem with arbitrage is that when everyone does it, there is nothing to arbitraging against, and the performance goes to 0.

The current hot area is not hedge fund, but private equity and other similar buy-out funds. Recent deals have gotten larger and larger, and there are rumors about taking Home Depot, with $90B capitalization, private.

[Saras]

The csfb tremont index is a global index of hedge funds and is used as a benchmark (at least at our firm - yea, we run a Baltic hedge fund ). Compare the swings (i.e., volatility (i.e., risk)) with Dow and S&P.

[Saras]

http://www.hedgeindex.com/hedgeindex/en/default.aspx?cy=USD

and here is a comparison of different strategies.

[KrazyHorse]

Originally posted by Lawrence of Arabia
KH comes trying to play with the economists - seems physicists cant do it all.

Sorry, I can't believe that I was 5 years out of date with current trends in the hedge fund industry.

I hate to tell you this, but I've yet to see a difficult concept in economics or finance...

[KrazyHorse]

Oh, and unlike some people here, I wholeheartedly and unreservedly admit when I'm wrong.

to drogue for correcting me.

[ColdPhoenix]

Originally posted by Drogue

Financial Services Authority

A good place to work! Great benefits and the money's not bad either. And you can access this forum from your pc (a lot of other websites like this are blocked). Of course, I'm on lunch at the moment...

[Drogue]

Originally posted by One_more_turn
The current hot area is not hedge fund, but private equity and other similar buy-out funds. Recent deals have gotten larger and larger, and there are rumors about taking Home Depot, with $90B capitalization, private.

Very true. Private Equity is a huge growth area, especially in Asia-Pacific. Something I'm tempted with, in the future, as it seems like quite an interesting job too.

Originally posted by Lawrence of Arabia
KH comes trying to play with the economists - seems physicists cant do it all.

Actually, I know there's a course on Financial Physics at Oxford that looks amazing. Basically applying fluid dynamic concepts to stock markets and other financial issues. Really quite interesting. Also, I know a physicist doing a masters in economics next year, as he wanted to switch. Physicists make good economists, because they have both the maths background, but crucially they've learned to apply it, to think in real world terms when faced with maths.

Mathematicians often find econometrics very hard, despite it being all maths, as it's all firmly grounded in reality. The rules aren't based on nice, logical methods, they're based on whether or not it makes sense in real life. Physicists somehow seem to get that better, IMHO. Or applied mathematicians and engineers.

Originally posted by KrazyHorse
I hate to tell you this, but I've yet to see a difficult concept in economics or finance...

That is true, however slightly misleading. Concepts in economics aren't hard, it's finding solutions that is. I can explain the concepts in, say, the economics of uncertainty, very easily in an hour or two, despite the fact that it's part of third year microeconomics. The hard part comes when you try to model economies more realistically, or to find out the effects of policies or other decisions, with uncertainty present.

The other part is that there's an awful lot of it. Economics is very broad, and while each bit individually is not hard, there's so much to learn. I mentioned the economics of uncertainty above as something you can learn the concept of in an hour or two, which was all I got to learn it in. That's 1/16th of one module. Economics isn't so much learning things in depth, at degree level, but learning *lots* of things. If you do go into depth, however, it does become very difficult. For example modelling choice when people aren't rational, or modelling different countries as different countries mathematically, then applying IMF stabilisation policies to them to see the effects. It's a very tricky business when you do specialise, and until then, there's just an awful lot of it.

Having said that, I got the same thing with maths this term. I'm finally taking a real maths course, and finding it really quite easy. Of course, I know when it comes to specialisation it's obscenely difficult - my brother's about to become a maths fellow at Cambridge, and his research I can't understand at all - but at degree level it seems more that you learn lots, rather than specifically hard things. I don't think anything at degree level is particularly hard, given the time to do it. The difficulty, at least here, seems to be getting through it all.

Originally posted by ColdPhoenix
A good place to work! Great benefits and the money's not bad either. And you can access this forum from your pc (a lot of other websites like this are blocked). Of course, I'm on lunch at the moment...

You work there?! Ahh yes, I remember the FSA team lunches...

[KrazyHorse]

Originally posted by Drogue

That is true, however slightly misleading. Concepts in economics aren't hard, it's finding solutions that is. I can explain the concepts in, say, the economics of uncertainty, very easily in an hour or two, despite the fact that it's part of third year microeconomics. The hard part comes when you try to model economies more realistically, or to find out the effects of policies or other decisions, with uncertainty present.

That's just a computational problem. Which is what we spend 99% of our time doing in physics, of course...

Again, this is not to insult economists. I like ribbing them as a pseudoscience, but apart from mathematicians, physicists and theoretical computer scientists they're the most able group mathematically.

The difference between economics and the other disciplines I mentioned tends to be that there are no particularly complex overarching theories. Modeling and application of solving techniques are all that is required. This is because the systems are far more complex and badly behaved. The analytic derivability of relationships is adversely affected.

[Saras]

The smartest prime ministers we had were both physicists

[ColdPhoenix]

Originally posted by Drogue

You work there?! Ahh yes, I remember the FSA team lunches...

Yeah, for 5 years now, joined a month after N2. A fun place to work with lots of different, interesting things to do workwise. It has a great social scene too! Was at an FSA pool competition last week, plenty of beer flowing meant that the standards actually fell as teams got towards the final!

[Adalbertus]

Re: Re: Hedge Funds

Originally posted by Drogue

Hedge funds provide absolute returns. That means anything that wants to grow at a sensible rate whatever the market does, needs to invest in a hedge fund of some sort.

This is just my point. If we assume that - at least on the long run (decade) - an index reflects the real development of economy, and thus the real profit made from investments, then every investor who has higher returns than the index would offer gets these returns from other investors who have lower returns (or losses).

Which would not be so much of a problem, but - in a mathematical language - in my understanding, the returns of an ideal hedge fund is the integral over a given time interval of the absolute value of the derivative of the index. Less mathematical: If the index goes up 5% and then down 5%, the ideal hedge fund has a profit of 10%, whereas the index fund has no profit. Thus, the ideal hedge fund tries - as much as the manager has the power - to make the share value of companies quickly going up and down, because the absolute value of the derivative is higher.

Now, my question is not about economics of individuals (which isn't something politicians should care about) but on national economics which includes those who gain and who lose. From this view, hedge funds (as redistributors of money) do no more or less a service to economy than index or other funds, because all of them provide companies with money and give (parts of the) profits to the investors. The tendency to create oscillations is something I see as detrimental.

For national economics, I don't see how it should be possible to produce higher profits (averaged over all funds) than indices indicate (long term), and if there are, they will be eaten by inflation.

[KrazyHorse]

in my understanding, the returns of an ideal hedge fund is the integral over a given time interval of the absolute value of the derivative of the index

I don't think so.

[KrazyHorse]

A true hedge fund is supposed to be indifferent to the market risk, not positively correlated with it.

For instance, in a classic long/short hedge I buy some shares of Coke while going short on Pepsi because I think Coke will outperform pepsi over the next little while. If both Coke and Pepsi go up at the same rate I don't make any money. If both Coke and Pepsi go down at the same rate I don't make any money. I make money based on how Coke does relative to Pepsi. I've hedged the market risk because I don't care how the overall cola market does.