[pantaloons]

Of course, if this technology was able to price securities better than the market (the fundamental job of almost every market participant), it would be printing money and they would not release it.

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.

[lordnacho]

> the fundamental job of almost every market participant

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.

[ionwake]

Hope you dont mind me asking a slightly unrelated and possibly dumb question.

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?

[lordnacho]

Yes, go on LinkedIn, there's a bunch of recruiters hawking jobs at funds. Generally they want a Sharpe ratio above 2.5, $10M profits a year.

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.

[yyyyip]

ok while we're playing "ask a hedge fund guy"

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?

[lordnacho]

Investors will ask you what you're up to, and if you're just doing that they won't invest. They also keep an eye on whether you're doing what you say.

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.

[DennisP]

Would that be this paper?

https://www.researchgate.net/publication/228139699_The_Stati...

[yyyyip]

But it would be pretty easy to obfuscate the whole thing behind a few layers of "We've got 50 PhDs working here, we run black box algorithms" etc etc, the strategy could be artificially made a couple of orders of magnitude more complex while still producing the exact same outcome.

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...

[radiusvector]

Strategy discussion aside, a 4% risk of ruin is not “low” by any means. A sophisticated investor would never accept.

[closeparen]

If you are making $10m profits a year, what do you need a job for?

[gringoDan]

If [0] those returns are accurate, can be proven, and your strategy can be scaled up to multi-million dollar positions, you should take it to a hedge fund/prop shop/etc. and be able to make 7 or 8 figures. Your bonus should be dependent on performance; you may be able to negotiate a % of the profit. Those companies don't care about your background if at the end of the day you make them money.

[0] Granted, that's a huge "if".

[ionwake]

I forgot to add the "worst" bit.

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

[gcb0]

and how do you prove some method scale up without either already being on the million dollar scale or disclosing your secret sauce?

[ohaideredevs]

The reason financial transactions don't scale is volume - your $100 trade can move a penny stock to $.02 from $.0002 a share if there is no volume.

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.

[bduerst]

Short of spending a million dollars right then and there, you can use historical market data. Or datasets provided by the person you're trying to prove it to. Keep in mind that after a certain volume, your model would start influencing the market itself.

[user5994461]

You mean +50 or +150% ?

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.

[ionwake]

You missed the key sentence after it, I have made what one consider a very good increase in other assets which I would discuss with the fund

[scarletham]

I think you're missing the gist of his statement and also overlooking the word "almost"?

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.

[lordnacho]

> most of your definitions are still dependent on competitively pricing securities

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.

[scarletham]

I work in a MM group so take this as you will, but the days of profitably making markets by just fitting everything to the screens are long gone.

[lordnacho]

I think it depends a whole lot on what exactly you are market making and how you're trying to profit. Of course many desks take views as well, but mixing in prop positions doesn't change the essence of it: the MM is trying to make money off being available for other participants.

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.

[ctlby]

The only real practitioner in this thread has one of the only downvoted comments. Incredible.

[user5994461]

One little correction.

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.

[wmxxpdx]

Thanks for being so concise. Getting license to sell estates (life insurance), hope to make $$$, worm my way into FINRA to take series 7, then try operate under reg crowdfunding to raise $1 million capital for new biz. What you do now?

[AznHisoka]

It's akin to Facebook open sourcing their social network framework, rather than the entire personal information of all their users. Of course it's useful to some people, but it's not what makes them money.

[pytyper2]

It's probably not a download it and run it piece of software, there are probably lots of configurations and likely requires the user to provide their own models and trading rules.

[trpc]

Investment banks don't even have the secret sauce, hedge funds like Renaissance Technologies and D. E. Shaw & Co. are the ones that have it

[chrisfinazzo]

It's a bit disingenuous to say that BB's don't have a stake in HFT.

At the time of Aleynikov's case, Goldman was routinely at the top of the NYSE rankings with regard to programmatic trading volume.

[nickles]

> 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.

[chrisfinazzo]

That's true. It's "LeFevre's corollary", if you will :)

N.B, Lapdance not gauranteed

[kranner]

Investment banks have proprietary trading desks that are effectively hedge funds.

[jen20]

GS used to be nicknamed “the worlds largest hedge fund”. They have plenty of world class proprietary tech, but the OP is right: this is not likely to be secret sauce at all.

[JackFr]

That's Harvard's endowment. Harvard University itself exists at this point merely as a tax dodge for the $37 billion AUM hedge fund.

[ryeguy_24]

I don’t think this is accurate. Regulators release the Volcker Rule to shut down prop trading at banks.

[nickles]

The Volcker rule contains exemptions for certain prop trading activities. For example, trading in US government bonds is exempt.

[rbavocadotree]

Here's nice flowchart[0] to determine what counts as proprietary trading. There is a surprising amount that is still allowed.

https://www.davispolk.com/files/DavisPolk_Final_Volcker_Rule...

[govg]

There still exist principal investing groups, as well as market making groups that can contribute to the bottom line.

[ryeguy_24]

Right. They have tons of trading activities that are non-proprietary. I’m sure they can always hide some positions that are truly proprietary but largely they are not supposed to put on positions for their own gain.