This is not the secret sauce, but probably an implementation of a set of standard well known pricing and risk models. That's still useful, and can be expensive to develop, so thanks Goldman.
Not true. You might make an argument that this is the effect of having them together in a market, but that's not their job:
- Market maker: hang around the market offering to trade with anyone (pref retail) at a spread. Doesn't care whether TSLA is gonna be able to make all those Model 3s.
- Pension fund: make sure they can pay the liabilities that are coming due. If that can be locked in, happy to pay a bit more than fair value to do so.
- Hedge fund: make absolute returns. Buy before it goes up, sell before it goes down. Whatever form of voodoo (or skill) fulfills this is fine. This doesn't have to mean finding the right price (could just mean you guess which way it's going), though of course often it is part of the objective.
- Broker: finds people on both sides of a trade. Doesn't care terribly much except to create excitement.
- Banks: lend money/securities and offer services to all of the above. Create research to make people trade. Securitise stuff so people can trade it. Often do a bit of everything.
Source: used to run hedge funds.
That being said, most of your definitions are still dependent on competitively pricing securities. A market maker who can't calculate reasonable theos won't be a market maker for long.
No, the MM doesn't care if TSLA is overpriced. He just sees where everyone is and makes a market roughly there.
> You can't provide quotes if you don't have something to quote around.
But you don't have to quote around the actual value of the item. That's the point.
You can of course also learn some things about where to market is going in the course of this business, and many desks are able to piggy back on some flow information for their advantage.
Im a programmer, but on the side have made on average 150% profit in share dealing over the passed 5 years, but more importantly, a much higher return in other assets to 2 orders of magnitude higher.
My question is - would experience / gains like this - if i had proof etc - get me an interview in a fund as some type of well paid (6 figure atleast) analyst?
[0] Granted, that's a huge "if".
Some markets can absorb an enormous amount of volume, such as the FOREX market.
Now, when you start making good trades in a "big" market, intelligent players can mimic / play off of them, so it is hard to prove in that regard.
At a minimum though, you could prove that it works on assets that are not volume-dependent.
It was mostly a gut feeling, after lots and lots of research.
My question basically is, if I show I have been really good in the past - without a specific model - is there anyway I would be taken seriously.
Thanks
And you need to know what machinery you'll need too. Capital requirements, counterparty agreements, access to stock lending, cost requirements, IT requirements, everything.
Some of the newer shops say you can keep your own IP. Haven't checked whether it's true, but most people I know are sceptical.
Say I set up a fund holding a low cost s&p500 index ETF, but at the end of each year sold naked puts with a ~1/25 risk of ruin to earn ~4% return. Therefore my fund consistently makes 4% over the market index, except for 1/25 years when it explodes and loses everything. Because the volatility is low, my sharpe ratio is good (until it explodes), correct?
Assuming it can stay in business >10-15 years won't I be a billionaire hedge fund manager by then and then change to a low risk strategy that only makes 1-2% more than market index with very low risk of ruin and just let my investors lose interest and quit the fund over the next decade while I continue to earn fees from them?
Anything that's both simple and mechanical is gonna have problems attracting investment. The guys you're talking to are gonna have problems justifying giving you 2/20 for buying a fund and selling options.
Or should. I've met a lot of investors who didn't ask the right questions.
Regarding the Sharpe, if they know what they're doing they're not just using the textbook version either. There's a paper by Andrew Lo about it, well worth a read, not terribly complex math.
https://www.researchgate.net/publication/228139699_The_Stati...
Do hedge fund investors keep an eye on whether you do what you say? How did Bernie Madoff go for so long if that's the case?
Of course the mechanism is simple and mechanical, but that isn't how you'd market it to investors.
I'll go read the Lo paper...
Madoff was the cause of all the due diligence, though I'd say Europe was a bit different from the US at the time.
Either way, it's insignificant and you're actually losing money. The stock of all the big companies went up tremendously in the past 5 years. Anybody who invested in large US equities made just as much if not more.
Hedge Fund: Convince customers to invest their money in the fund. Extract as much of it as possible through fees. Doesn't care much where the market goes, charge a fee either way, a bit more if it goes up.
https://www.davispolk.com/files/DavisPolk_Final_Volcker_Rule...
At the time of Aleynikov's case, Goldman was routinely at the top of the NYSE rankings with regard to programmatic trading volume.
I took 'secret sauce' in GP's comment to mean 'profitable strategies'. Don't confuse volume with profitability. It's conceivable that a BB would deliberately lose money in some activities to have clients give them other, more profitable flow/business.
N.B, Lapdance not gauranteed