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Do educated traders make it harder to make a profit
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Do educated traders make it harder to make a profit

  #31 (permalink)
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@Outlier: It sounds to me that you're desperately grasping at straws.


Outlier View Post
Bloomberg compared large hedge funds, with assets under management greater than $1 billion. Not mid-sized hedge funds, nor any other type of investment vehicle.

The ranking method was simple: Bloomberg looked at the year-to-date return for the ten months ended on Oct. 31, 2012. That was the entire procedure to come up with the top performing hedge funds. A 10-month snapshot of returns.

As it turns out, Hintze, Cooperman, Odey, Hanover, Tepper, Loeb, Rosenstein, and Halvorsen suffered losses in the prior year 2011 with their funds from the top 20. More history is not available in the article.

You basically showed that a prerequisite to become a big hedge fund manager with large $AUM is going to college. However, there are quite a number of professions where college education is a requirement, this is not unusual per se.

The supposed link to top trading performance seems questionable, since the prior year's losses indicate the long-term nature of these funds. A 10-month snapshot is quite random for a long-term investment. Even if these were the best 20 managers, college degrees would certainly not separate them from their peers.

You're missing the big picture: There are about 4,100 universities in the United States. Whatever methodology you use to decide the "top traders", you will find that there is an overwhelming, over-representation of the top 30 universities among them. This cannot be purely because hiring committees at large hedge funds unfairly prefer to hire people from the top 30 universities, because if graduates from the top 30 universities are not measurably better traders than those from the remaining 4,070 universities, we would rather hire graduates from the lower-ranked universities because we can pay them less.

There are definitely ways to improve on the selection and definition of the top-performing traders, and even better ways to define what it means to be more or less "educated". But you realize that what you said actually lends to my conclusion: Even without any deliberate method of selecting my sample (which would inevitably contain confirmation bias on my part), and going by a random Bloomberg article's perceived selection of top managers, I still arrived at the same group of universities.


Outlier View Post
Interesting examples. It turns out however that breaking SEC rules actually is illegal, regardless of how much money HFTs pay for proprietary feeds. That second link you explicitly referred to contends PACF violated a rule that NYSE was fined for in 2012.

SEC.gov | SEC Charges New York Stock Exchange for Improper Distribution of Market Data

"Washington, D.C., Sept. 14, 2012 —

The Securities and Exchange Commission today brought first-of-its-kind charges against the New York Stock Exchange for compliance failures that gave certain customers an improper head start on trading information.

SEC Regulation NMS (National Market System) prohibits the practice of improperly sending market data to proprietary customers before sending that data to be included in what are known as consolidated feeds, which broadly distribute trade and quote data to the public. This ensures the public has fair access to current market information about the best displayed prices for stocks and trades that have occurred.

According to the SEC's order against NYSE, the exchange violated this rule over an extended period of time beginning in 2008 by sending data through two of its proprietary feeds before sending data to the consolidated feeds. NYSE's inadequate compliance efforts failed to monitor the speed of its proprietary feeds compared to its data transmission to the consolidated feeds."

You're going completely off-topic here. The original discussion was that the author in HFT?s Unfair Trading Advantage / Front Running | The Big Picture claimed that certain market participants practiced front-running.

I don't see the relevance of highlighting that the NYSE had been violating SEC regulations, which is the NYSE's responsibility alone and has nothing to do at all with frontrunning, and which all the more proves my point that there is no wrongdoing on the part of the trading firms referred in that article.

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  #32 (permalink)
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artemiso View Post
Would I be willing, as an investor to underperform the S&P 500 for the convenience of having only to log to a customer portal 52 weeks a year, and having a K-1 prepared for me at the end of the tax year? Yes.

Underperform in this case also could mean a -20% difference. So why would you take that chance when you could just buy the ETF at the beginning of the year and you don't even have to log in anywhere for a whole year?

Now in this discussion comparing HF managers who has billions AUM to daytraders is rather futile, so maybe small HF managers are a better comparison...


Quoting 
- If you ignore 2008/09,

If we ignore the car accident where I killed 4 innocent bystanders my driving record is pretty damn good. What is that % without ignoring the 2008/09 crash?


Quoting 
the percentage of institutional accounts at our primary clearing firm that closed in the last 10 years was less than 5%.

And that statistics is certainly not representative of the industry standard, but I congratulate your firm on their results...


Quoting 
You still have not explained to me why you think anyone else could have done a better job of managing LTCM's assets after the hit from the liquidity crisis.

That wasn't even the topic. But you still haven't explained to me how could they blow up and so badly that they almost took the whole industry down with them (at loeast that was the fear) if they were so smart and educated...


Quoting 
JWM isn't indicative of anything.

Sure it is. It is a perfect example that even smart/educated people don't learn and they do the same mistakes over and over again. Oh I am sure they said: Hey, we had a 6 sigma event recently, sure we are not due for another one for the next 20-30 years, so no reason to change the strategy...

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  #33 (permalink)
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Pedro40 View Post
If we ignore the car accident where I killed 4 innocent bystanders my driving record is pretty damn good. What is that % without ignoring the 2008/09 crash?

I mentioned to ignore 2008/09 because that was such an anomaly and mess that our prime brokerage rep didn't remember the exact fatality rate. That said, I'm willing to wager that the retail fatalities in 2008/09 far exceeded the institutional fatalities in 2008/09, and as Outlier had pointed out, institutional accounts are highly correlated with 'college-educated' accounts and beyond. So my conclusion still holds in 2008/09.


Pedro40 View Post
Underperform in this case also could mean a -20% difference. So why would you take that chance when you could just buy the ETF at the beginning of the year and you don't even have to log in anywhere for a whole year?

For the same reason I'd rather not buy 100 houses in Southeast Florida.


Pedro40 View Post
Now in this discussion comparing HF managers who has billions AUM to daytraders is rather futile, so maybe small HF managers are a better comparison...

I don't find the comparison too unfair. Having billions in AUM entails different types of handicaps. Your risk of SEC enforcement actions and operational meltdowns increases exponentially with AUM.


Pedro40 View Post
And that statistics is certainly not representative of the industry standard, but I congratulate your firm on their results...

That's our clearing firm, not us, but yes, they do a pretty good job of accepting only creditworthy clients, but there's significant self-selection among the larger PBs/clearing firms.


Pedro40 View Post
That wasn't even the topic. But you still haven't explained to me how could they blow up and so badly that they almost took the whole industry down with them (at loeast that was the fear) if they were so smart and educated...

They were very unlucky - one could win two Nobel Prizes and still die of an early age from cancer.

What do you consider the most important traits for trading? People usually think of some combination of capitalization, experience, intelligence, preparation, and luck. Unfortunately, trading outcomes are largely dominated by one of the above.


Pedro40 View Post
Sure it is. It is a perfect example that even smart/educated people don't learn and they do the same mistakes over and over again. Oh I am sure they said: Hey, we had a 6 sigma event recently, sure we are not due for another one for the next 20-30 years, so no reason to change the strategy...

Actually, I heard Eric talk about this last year and I understand that they made several improvements, all of which I consider very sound. These improvements concern how they ran their strategies, which explains why none of this came to be publicly-known. I can give you specifics in PM if you're interested.

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  #34 (permalink)
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artemiso View Post
@Outlier: It sounds to me that you're desperately grasping at straws.

Let me say it this way: I value honesty.


artemiso View Post
You're missing the big picture: There are about 4,100 universities in the United States. Whatever methodology you use to decide the "top traders", you will find that there is an overwhelming, over-representation of the top 30 universities among them. This cannot be purely because hiring committees at large hedge funds unfairly prefer to hire people from the top 30 universities, because if graduates from the top 30 universities are not measurably better traders than those from the remaining 4,070 universities, we would rather hire graduates from the lower-ranked universities because we can pay them less.

There are definitely ways to improve on the selection and definition of the top-performing traders, and even better ways to define what it means to be more or less "educated". But you realize that what you said actually lends to my conclusion: Even without any deliberate method of selecting my sample (which would inevitably contain confirmation bias on my part), and going by a random Bloomberg article's perceived selection of top managers, I still arrived at the same group of universities.

Yes, you also showed prestigious schools in the resume of the chief manager help to attract capital. You made that point with your more or less random sample drawn from the population of large hedge fund managers, with AUM over $1 billion. That was part of your premise, making this the conclusion can only be completely fallacious. I could as well sort in ascending order by 10-month random snapshot return and conclude that the worst managers are highly educated.


artemiso View Post
You're going completely off-topic here. The original discussion was that the author in HFT?s Unfair Trading Advantage / Front Running | The Big Picture claimed that certain market participants practiced front-running.

I don't see the relevance of highlighting that the NYSE had been violating SEC regulations, which is the NYSE's responsibility alone and has nothing to do at all with frontrunning, and which all the more proves my point that there is no wrongdoing on the part of the trading firms referred in that article.

The author suggested HFT can front-run due to unfair feed advantages, and backed it up with NYSE's preferential, rule-violating treatment of proprietary feeds. If you think he is going completely off-topic, you may want to add that comment to his site.

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  #35 (permalink)
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Outlier View Post
Let me say it this way: I value honesty.

You shouldn't say something like that unless you intend to severely discredit yourself here. A quick search shows that the past history of your posts suggest that you have a personal agenda against me, and it doesn't take much effort to put two and two together and conclude that you're finding fault with me for anything but honest reasons. (And in fact, quite on the contrary, I have explicitly spoken up to defend you on this forum before.)


Outlier View Post
Yes, you also showed prestigious schools in the resume of the chief manager help to attract capital. You made that point with your more or less random sample drawn from the population of large hedge fund managers, with AUM over $1 billion. That was part of your premise, making this the conclusion can only be completely fallacious.

I don't comprehend what you're saying over here.


Outlier View Post
I could as well sort in ascending order by 10-month random snapshot return and conclude that the worst managers are highly educated.

But I get this part, and believe that your reasoning is faulty. Here's why. There's an asymmetry between the group who generate the best rolling 10 month absolute returns and the "worst managers": The first population is very small, while the second population is very large. And I managed to show that 100% of the top 20 managers all graduated from the top 30 universities.

On the other hand, the worst that a manager can perform is to completely close down, so going by the mantra that 4 to 10% of hedge funds close per year, there are at least 400 to 1,000 managers who form the bottom group alone. You would need to show that the bottom 400 to 1,000 managers all come from within the top 30 universities to prove me wrong using that line of reasoning.


Outlier View Post
The author suggested HFT can front-run due to unfair feed advantages, and backed it up with NYSE's preferential, rule-violating treatment of proprietary feeds. If you think he is going completely off-topic, you may want to add that comment to his site.

1. It's not an "unfair feed advantage" when everyone has access to the same proprietary feeds if they pay for it and there's plenty of space in Mahwah. That's like calling "first class passengers" out for an "unfair seating advantage"...

2. In this instance, no trading firm was responsible for the mistakes made by NYSE. Clearly, there's a reason why the SEC penalized NYSE and not a group of trading firms for this.

3. I still don't see what's considered frontrunning here. No matter how fast you receive it, a market data feed only broadcasts past events, not future events.

4. If you think that they are practicing anything unfair, I would invite you to share your comments, as I can connect you with their legal team, if you PM me.

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  #36 (permalink)
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Guys...

is it me or is this discussion totally off the rails. It was never even established "what" a trader is?

I went to an interview here in Chicago at a very highly renowned hedge fund started buy a brilliant Harvard guy while he was still at Harvard. I went to very average state school and focused mostly on football, girls and a good time. So how in the world i made my way to the interview I'll never know for sure. I did have a track record...a lot of respected guys new me and liked me. I had a "professional profile", but nobody asked for it. Name and phone number on a yellow pad, write your number on a name tag and put it on.

Three guys come in pass out three by five index cards and give the following instruction. First question is, if you are hired and you can choose your compensation to be either silver dollars stacked up in a single stack from the street to the top of the sears tower or stacked neatly to fill this conference room, what would you pick?

Rest of story after I get my son.

Don't answer yet.

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  #37 (permalink)
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So they come back in...

after about 5 minutes. They say turn in your index cards who wants to be the first to answer the question? Of course I said, I'll go first. The youngest looking guy, definitely the one I wanted to smack the most goes, "I hope there is more in your head than what you put on your index card". To that I respond, "nobody ever said write on the index card".

So at that point I had given two correct answers before I even answered. I said I wanted to be first...which is what they are looking for. I followed directions, which is also what they where looking for. The senior guy gives me back my blank index card and says, "with two words write on the card which way you would like to be paid conceal the answer , then sit back down". So I wrote "this room" on the card folded it in half and sat back down.

The other two guys had all kinds of calculations, estimations, and questions written on their cards. They where given their cards and asked to explain their answer...never asked to write it down or conceal it. I knew that that point they where "out" and I was still in because they where not asked to document and conceal. So these poor bastards...the super highly educated ones... are up at the white board trying to show the approximate "pay" in each scenario and the interviewers smirked and mocked...it was brutal. They where dismissed and before three other interviewees came in the room the guy I wanted to smack asked me how come I did not ask any questions or interject. I replied that I though if someone wanted to hear from me they would ask and that in my situation I'd be better served by listening than talking? He asked me my name and said, "Dan, you have a shot.

The three others from previous groups come in and we are left by ourselves. Nobody knew the conference room mic was on and our hosts where listening to the dialogue. The other four talked about their credentials. I made fun of the guy I wanted to smack. The hosts come back in and say. The four of you can follow directions, you did not write on your cards. One of you might get a chance with the firm. Who wants to go first...of course all of us spoke up. The guy I wanted to smack picked me...he goes Dan before you answer, what is your problem with my shoes. To which I answer...you east coast ivy league fags like those polished up square toes, and 300 dollar ties, I'd rather have work boots or be barefoot. The hosts freakin roared at that. He responds with a high five and goes you are first, before you answer do you have any questions? No, pay me in silver dollar stacks to fill this room. Why he asked. I said...if given a choice between linear and volumetric I'll choose volume every time. He goes sit down lumber jack.

The other guys all asked questions to help verify their thinking. That is not a good thing. The hosts wanted a decision, certainty and then support if they asked for it.

I moved to the next "test" because I followed directions, answered correctly, though on my feet and responded well to pressure.

There are many roles in trading, many types of traders and "educated" is subjective.

On the way out I was waiting for their receptionist, I'd asked her if she wanted to go to the hockey game and have drinks. My hosts saw this and I could tell got another laugh. The guy I wanted to smack asked me in the elevator if I wanted to know how much money the two options would pay me. I said no, the point was to get to the next stage I don't care at all about the fantasy land stuff...but I do have a question. The guy who actually figured out the difference correctly in 5 minutes, does he work here? He goes, two people have done that, one owns the firm, the other guy is an east coast fag with square toed shoes.

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  #38 (permalink)
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Hey Wldman, that was a fun story! Since we are at anecdotal evidences, let's bring up yesterday's new season of Survivor. It has 3 groups, Brawns, brains and beauties. You probably see where I am going with this.

So there is this competition where they have to put puzzles together. The brains reached that section first so they even had time advantage. The woman who was doing it is a nuclear engineer. She screwed it up so badly, that they ended up 3rd, even the beauties, who were way far behind beat them....

So they lost the first 2 challenges and both involved puzzles...

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  #39 (permalink)
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artemiso View Post
I'm willing to wager that the retail fatalities in 2008/09 far exceeded the institutional fatalities in 2008/09,

I know, I don't care when my dog dies as long as my neighbour's dogs died too...


Quoting 
I don't find the comparison too unfair.

But it is and not just always for retailer's advantage. Obviously a small account runs into liquidity problems less often than a billion dollar account. But a big HF manager has way more resources under his weaponry. Also they can be more like investors than daytraders, so the comparison is really bad.

Now a smaller HF that trades in and out everyday, the comparison can work...


Quoting 
That's our clearing firm, not us, but yes, they do a pretty good job of accepting only creditworthy clients, but there's significant self-selection among the larger PBs/clearing firms.

Outlier already pointed out the problem of that sample. If we are talking about the industry as a whole, what is the survivor rate of an average small sized HF? In a 5 years period it is probably under 10%...


Quoting 
They were very unlucky

LUCK is a four letter word in trading. And they got unlucky twice....

There is a disadvantage in having too much education, specially when someone is taught of a trading system. A less educated person can just blindly follow the rules and trade it, but the smarter the person, the more they second guess or criticize the system and alter it.

I tried to look up HF survival rates, back in 1998 in one sector 65% died just in that year:

http://www.travismorien.com/FAQ/hedgefunds/hedgesurvival.htm

Generally small funds die faster than big ones....


Last edited by Pedro40; February 27th, 2014 at 12:35 PM.
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  #40 (permalink)
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Pedro40 View Post
Now a smaller HF that trades in and out everyday, the comparison can work...

Sure, I can take capitalization out of the equation. A principal trading group does not benefit from capitalization, since it does not take management fees. Above that, the top 10 (by gross dollar revenue in 2013, before someone accuses me of not naming the selection methodology) principal trading groups are only capitalized about as much as the smallest hedge funds ($100-500M).

Yet nearly 90% of the entry-level hires at these 10 principal trading teams come from 5~6 universities. If you focus on the top 3 teams, this number becomes even more skewed (maybe 95% from 3 universities). And the success rate at these firms is practically 100% through '08 until '14. You pretty much stayed at your firm until you retired from the industry. One team hasn't hired a single person in the past 3 years because they had zero turnover.

Again, if you believe education doesn't matter, you'd question why they didn't fire all of their staff and replace them with interns from state universities. I can tell you from experience that hiring PhDs is not cheap.


Pedro40 View Post
There is a disadvantage in having too much education, specially when someone is taught of a trading system. A less educated person can just blindly follow the rules and trade it, but the smarter the person, the more they second guess or criticize the system and alter it.

It's up to you. I've always wished that I had more education, not less.

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