A few items grabbing my attention this week…

Eric Rosenfeld’s Analysis of LTCM at MIT
Hat tip to the Big Picture and Skill Analytics (warning: video about an hour long)
I’m always fascinated by peeks inside LTCM and its collapse.

I have a number of thoughts RE: Rosenfeld’s presentation, most of which could be summed up with the word “hubris”, but the biggest “I can’t believe it’s not humble” moment is Rosenfeld’s apparent continued belief that risk of loss can be perfectly quantified (and his denunciation of those who think otherwise). Ridiculous.


Condor Options’ Binary and Polinary Trading Strategies

Condor tackles a subject that receives far too little attention from traders and I think anyone who is a serious mechanical trader needs to take the time to at least wrap their head around the concept. I’ve covered this previously in Transactional vs Confidence-based Trading Strategies.


Condor Options’ Moving Averages and Human Risk

Another from Condor.

It’s a struggle to make investors really understand and internalize why risk-adjusted returns (and not just absolute returns) are important. Condor’s sums it up nicely in language we can all understand…

Absolute performance is, ultimately, all that matters. But as long as there are human animals choosing strategies and allocating capital, some accommodation must be made for the cognitive biases and innumerable flaws to which we are prone. One way of coping with the fact that any trading system will be subject to what we might simply call “human risk” – the danger that the well-dressed ape sitting behind a desk will break something – is to construct strategies that are less likely to agitate anyone. That means targeting not just absolute returns, but also returns that are less volatile and more consistent. Sharpe, Sortino, and other common metrics do just this: they recognize that a strategy is more valuable if it doesn’t goad the wildlife needlessly.

Happy Trading,


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2 Responses to “Links”

  1. I love at the beginning where he’s talking about 20-30x leverage being normal and that they only went to 300x leverage when the sh*t hit the fan – uh, 20-30x leverage is insane. At the end, he says “I think the model is broken and it will be hard to raise capital for a fund that uses leverage” – while I agree it will be difficult, in the future, to rely on leverage, the issue isn’t leverage in general – it’s the amount of leverage that matters. He just seems to have learned nothing from the whole affair that really matters.

  2. Actually about 84 minutes long, but an utterly fascinating, must-watch video for anyone involved in the markets. One of Rosenfeld’s comments reminded me of I Just Don’t Get It (the Failure of Mutual Funds to Think Outside the Box). There’s a great business model in there if we can put the pieces together.

    Damian: “I agree it will be difficult, in the future, to rely on leverage, the issue isn’t leverage in general–it’s the amount of leverage that matters.”

    Yes and no. Liquidity is at least as important as leverage. If you must exit your positions, is there someone who will take the other side of the trade without killing you? Does everyone know your positions? Are your positions so big that you are the market?

    I use modest leverage in my own trading (rarely more than 2:1), but stick to the most liquid of instruments–futures, ETFs, and stocks with big volume and big open interest/market cap. Even stuff like this can get illiquid at times (see also, Crash of 1987), but these markets will “thicken up” a lot quicker than some of the OTC stuff.

    Michael, thanks for posting this video, great stuff.

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