
One of Wall Street’s Most Popular Trading Strategies Is Now Failing - jonbaer
https://www.bloomberg.com/news/articles/2019-03-01/one-of-wall-street-s-most-popular-trading-strategies-is-now-failing
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galaxyLogic
So the article seems to be saying that CTAs are failing which is true based on
numbers and then claims this is because the environment is too random.

But shouldn't we consider as possible cause the fact that CTAs became common.
When multiple parties use the same strategy it can not be winning any more for
everybody.

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evrydayhustling
Yes - and there is also a second order effect where latecomers to a well known
strategy must focus on marketing and cost reduction to compensate for lower
alpha, so each dollar flowing into the strategy is more likely to go to a less
innovative, follow+on implementation (such as algorithms packages offered by
big banks).

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djakjxnanjak
Consider the market for a bond. Smart investor figured out that the default
risk on the bond is lower then we thought. More people find out and there's a
lot of demand for the bond so the price goes up. Now the bond trades above
face value, so new investors get a lower % return, and the bond is no longer a
good deal, so the price stops rising.

The same issue holds true for stocks, which are also valued based on a claim
for some predicted future cash flows.

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pertymcpert
Yes, and for anyone interested your second paragraph is the definition of a
“security”.

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csomar
I thought that is the definition of an "asset" which is a broader term.

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PakG1
Assets cannot by themselves generate future cash flows. If a house just sits
there, it cannot generate cash flows, it needs a tenant to do that. A hundred
dollar bill cannot generate cash flows by sitting under your pillow. It needs
to be put to work to generate cash flows. Assets can be used to generate cash
flows, but they cannot generate cash flows just by existing. Hence the
difference between asset and security, though both can be ascribed to have
value.

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evrydayhustling
Securitization is about ease of trading - which is helped by but not defined
by ease of collecting cash flows.

An asset is exactly something that can generate future cashflows, even if only
by being sold. A security is a special kind of asset that can be easily traded
on paper without changing it's value or taking on transformative effort.

So, your goose that lays golden eggs is indeed an asset, but it might be hard
to trade because many folks aren't well prepared to own a giose. If you wrap
it up in contracts about someone who will house and feed the goose, collect
and sell the eggs and forward the money to the holder of a deed - congrats,
that deed is now a security.

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ackbar03
I think getting a bunch of smart people to work on making automated trading
strategies 24/7 is a tremendous waste of talent

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roenxi
Allocation of capital is one of the most important roles in society, bar
possibly the judicial system and maybe the government legislature. Not the
most powerful role, but quite possibly the one that has the biggest practical
impact on people's daily lives along with entrepreneurs. We want smart people
working on it.

There is a lot to say on the subject of whether the financial system
regulation is creating the right incentives. But there isn't really much room
to debate that designing trading strategies is a waste of talent.

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ackbar03
Yes, that and improving efficiency of markets, the go to arguments for wall
Street types. I used to be a sell-side trader, allocation of capital was the
last thing on our minds. It might add value to the economy in the long run but
I'm pretty sure it's way too crowded now with little marginal benefit. If we
took the underlying technology and man hours used to make something more
useful I think the world would be better off. Something is seriously twisted
in its current state

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roenxi
> I used to be a sell-side trader, allocation of capital was the last thing on
> our minds.

Bit risky telling someone what their job is, but nevertheless I'd suggest you
missed the forest for the trees. The profitability of a trading firm is
directly linked to their ability to allocate capital in a way the market
likes, and someone with great information thinks that hiring lots of smart
people achieves their goals more effectively than hiring small numbers of
smart people.

> Something is seriously twisted in its current state

100%, but it isn't the concentration of smart people in finance. That is a
good thing - better more scheming bankers than lawyers.

Free market capitalism gives capitalists perfect freedom to operate in the
sliver of the Venn diagram that connects what is possible with what customers
will pay for. If they step outside that, they go bust.

If there is a problem is probably that the US government didn't let enough
companies go bankrupt in the aftermath of the 2008 crisis, and the same idiots
that were in charge then are still in charge, or their protegees.

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ackbar03
>Bit risky telling someone what their job is

? Because...?

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djakjxnanjak
Good trading strategies always stop working (after fees) when they get
commodified.

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mamon
Really? I always thought the opposite is true: trading strategies work BECAUSE
they get commodified. I mean, it's like self-fulfilling prophecy: if enough
mutual funds managers look at the price chart, draw the same magic lines,
apply the same magic formulas, then they reach the same conclusion "buy this
stock". And then they start throwing their billions USD of assets at it, and
the stock price actually starts climbing up.

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adrianN
But people who have better insight into the real performance of those
companies can make more money if more people just apply magic formulas.

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askmike
The most successful fund for the last decade(s) fits more one the magic
formulas side (the Medallion Fund from Renaissance Technologies).

EDIT: Oops, I misread your comment.

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3dinfluence
These strategies have only been around while the fed has been heavily involved
in propping up the US economy with artificially low interest rates and
quantitative easing. So I am not surprised that the algorithms and models that
have grown up during this period are now struggling now that the fed is trying
to back off a bit.

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FabHK
I don't think that's right.

CTAs have been around since the 1970s. Momentum trading has been around
basically forever.

The Fed under Paul Volcker raised rates over 20% in the early 80s to head off
inflation. Before the crisis of 2008 rates were 5% or so. It's only after the
GFC that rates have been lowered to near zero.

Also, according to the article momentum trading failed to deliver after 2008,
while rates were low (and the market tripled), not just now.

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rorygreig
The fact that trend following strategies are becoming less effective could be
interpreted as a positive thing implying that markets are becoming more
efficient, as trend following shouldn't work in a completely efficient market.

Trend following strategies are pure market followers and are not based on
fundamentals, therefore they do not bring any new information into markets and
are unlikely to improve the efficiency of a market.

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speedplane
If an algorithm existed that could predict the future value of stock prices,
that same algorithm could be relatively easily adapted to see the future. Not
only is that tech impossible, it's also depressing to think that a true
Oracle's primary function would be to help traders make more money.

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frozenport
But does the future it sees include the purchases its about to make?

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speedplane
> But does the future it sees include the purchases its about to make?

Yes, absolutely. Go back to Greek mythology (or even the Matrix movies). Many
predictions the Oracle made only came about precisely because the Oracle made
those predictions.

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piker
Why does this article call them CTAs? Being a "commodity trading adviser" is a
CFTC regulatory status, not a trading strategy. Those issues are orthogonal.
One would have expected them to be referred to as algorithmic traders or algos
or something.

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rorygreig
My understanding is that CTA is a general term for a hedge fund that uses
trend following strategies, primarily trading futures, but not actually
restricted to commodities, so it's not a particularly accurate name, just
industry jargon.

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zelly
Too many people doing the same thing in a zero sum game—of course it wasn’t
going to work forever.

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skookumchuck
Any algorithmic strategy will cease to work once it becomes generally known.

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zxcvbn4038
I once watched a bunch of card counting videos on YouTube. It didn’t matter
who made them, all of them were basically N minutes of the guy cursing and
complaining that the other players were getting the cards they should have
gotten. This sounds like more or less the same thing.

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pfortuny
Predicting the future works until is does not. This happens a lot more
frequently than ome might think.

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NicoJuicy
I always thought that HFT is a losers game.

There can only 1 be the fastest and those that invest their money this way,
could probably used it in a better way.

And if you are winning. A small error in the algorithm could make you lose all
of your profits. Rare events do happen and you haven't covered every case.

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jhoechtl
The interest rate based system of growth?

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chvid
Market moves sideways - trend following underperforms ...

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ashelmire
From the graph in the article article, trend following has been abysmal for
the last decade.

> Between 2008 and 2018, Societe Generale’s main trend-following index made
> only 3.7 percent, compared with an average gain of 62 percent for hedge
> funds and a more than tripling in the S&P 500, including dividends.

The market performed incredibly well over this period. These algorithms didn’t
even keep up with inflation.

