YouSaid · the spoken record

Mike Harris

lines on the record: 66
first: 2024-08-19
most recent: 2024-08-19
sittings or episodes: 1
sources: podcast

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“AI does make stuff up. I've seen people ask a large language model, like how many rocks should I eat per day to be healthy? And they say, well, actually, scientists said between two and eight rocks, more than eight rocks is unhealthy, but fewer than two rocks is also unhealthy. So you want to be, you want to eat two to eight rocks. So if you word in a certain way, you know, it's a people pleaser. And if you ask a question, find me a strategy that makes 100% a year with a sharp ratio of 20, you know, the risk is it might pretend to actually have that strategy when it doesn't. And it's a huge tail risk. Michael, this has been fascinating conversation. Thank you so much for sharing your time and insights. And thank you, everyone, for watching.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Path or know that that doesn't look right to me. I'm going to do something else as opposed to fully automating it and just letting kind of the AI kind of trade without some sort of human intervention or partnership. And I think that we're also seeing great advances in other parts of our business. We read hundreds of academic papers. That's what quant funds do using things like ChatGPT to create a summary means that you don't have to read.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Looking at backward looking data, it might build a model that would have made a lot of money last year that doesn't necessarily mean it's going to make money this year. So I think we kind of try to put guardrails around our approach to AI. I mean, it's certainly way more scalable and efficient than a human being going out and doing research. So if you can set it on a problem and have it go out there and then create a nice little summary of all of the work that it's done to kind of help the humans, we think of kind of AI technology kind of working with human beings to make them more efficient as opposed to just doing the work for them, so to speak. And so there's plenty of examples kind of across our business where you can use AI to kind of look at the problem, run a million different iterations, and then give you some suggested kind of recommendations, if you will. And then the human can decide, okay, I want to pursue that.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“And so there's a huge spectrum. I think we said somewhere in the middle, you know, as a quant fund, think about our process is you come up with an investment thesis, you find data to support it, you build a model, you run back tests, you make tweaks to it, to the parameters you're choosing, and then you get approval and you put capital to it. Well, it sounds like training AI to do that is not that difficult. But the problem that you have in our space and technology aside, you always worry that a model is what we call curve fit, right? Curve fit is when somebody looks at what happened in the past and they build a model that looks incredibly profitable because they know what happened. That's curve-fitting. Well, the fear that we have with AI is that it's a giant curve fit. When you train a model to kind of look at the data and say, go build me a great model, if it's”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“See, as I said earlier, we could not get through a podcast interview without mentioning the buzzword that is AI. You know, in the quantitative hedge fund world, we joke a little bit about AI because we've been using as an industry machine learning techniques for 20 to 20 to 30 years. We were kind of some of the first folks in finance to play with things like regressions and using machine learning techniques. You're 100% right. They continue to evolve and get better over time. I think depending on what fund in the industry you talk to, there's a different level of from some people who are skeptical and don't want to use any AI to folks who I've heard about some recent launches of dedicated AI strategies that are 100% machine learning.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I think you're right. And it goes back to my earlier point that it's one of the reasons why I love working for a quantitative fund where we build the models, we feed them with data, and it helps us to make our trading decisions. It's very, very difficult to sit around that room with smart people and try to predict what's going to happen, what's going to move. And as Wayne Gretzky used to say, you can't, you got to skate to where the puck's going, not to where it is. And that's hard. It's really, really difficult to make some of these calls and predictions. And so I've always been a believer in a systematic process. And the older I get, the more time I spend in the space, the more I realize that I'm thankful that I chose this as a career path.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“And I could be wrong with the numbers 50% of the move is the market and 30% of the move is the industry. So in this case, regional banks. And then he's being generous at 20% was due to individuals, beta or alpha. But maybe it's less now. It's just so much is not not caring about the fundamentals.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Thank you, Michael. And yeah, on that commercial real estate point, it's funny, like a lot of the commercial real estate credit risk is within the regional banks, you're absolutely right. But it's also within the nonbanks, CMBS market, insurance companies, publicly traded ETFs, but that trade the debt, like mortgage reeds. But it's very, it's like some regional banks have a ton of commercial real estate credit risk and some have zero, but the stocks trade as if they're all the same thing. And it's so funny. Like, you know, when interest rates go down, the market perceives that as good for regional banks, but there's like an individual regional bank that I know they want actually higher interest rates, but it goes down. And it's funny, like the fun, like on the fundamentals, you know, Sunday on the intradays, fundamentals really don't matter. And that goes, you know, the Stanley Drucker Miller quote, if you said it 20 years ago, but it's probably true now than it is then was then, that he goes to these hedge fund dinners and all the hedge fund managers talk about, oh, I like this doc. I like this stock, blah, blah, blah, blah, blah, blah. And he says, like 50% of the move is...”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Obviously, what we're hearing is that it wasn't a hack, it was a simple upgrade that went wrong. I am hearing there were a lot of hacks on the back of it as people rushed to try to implement fixes and basically got fished by the bad people who were putting out militia.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“35 from a work from home perspective on any average day. So work from home is not going away, which means that commercial real estate is struggling. The vacancy rate across the US right now for CRE is 20%. Moody said the other day that could get as high as 25% over the next year or two as people as their leases are coming up in these office buildings in places like New York where I am and they just say, you know, we had four floors in your building because of work from home. We only need two. So we're still going to have office space, but we're giving you back some, that's putting a lot of pressure on that market and the landlords and then obviously the regional banks are the ones that are holding all of that debt. So that could be something that we could see developing in the future. You got to think about cyber risks with what happened with CrowdStrike just two weeks ago.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Correct. Realize volatility does grow kind of going into an election. And we've already had an assassination attempt, a candidate who we thought was running stepped down, a new candidate kind of forced into the seat, a split, if you will, amongst my friends in the Democratic Party that don't know whether or not the process was right or should there have been another primary is Kamala the candidate that they won who knows, but there will be, I'm sure, a lot of all between now and then as markets react to not only polls, but the overseas betting markets. And so, you know, hey, buckle up, if you will. I think some larger issues that are just out there that could kind of come about, we talked about the regional banking crisis. That problem hasn't gone away. I mean, I saw recently that the average”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Right before Powell's speech at the infamous Jackson Hole, which there have been obviously a lot of market moving talks over the years that have come out of that economic forum. And so I think all eyes will be focused there to see whether or not the Fed starts its cutting cycle. But you get a hot inflation print and all of that priced in cuts kind of get backed out of the market. that can definitely create some noise and not only fixed income, but equities and currencies. The election, we knew that this was going to be a highly contentious race. We knew that there historically, when you look at the years of elections and the volatility profile of the markets, that Val just basically builds into the election and actually comes off pretty dramatically once we know who the winner is.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“That if China wants to make a move towards Taiwan in the South China Sea, I am not their military forecaster, but the US is already involved in two conflicts and there's an election obviously happening in November. So if you wanted to be more aggressive with your agenda, now might be the time to flex some muscle. We've seen some conflicts with China and the Philippines where it almost feels like they're doing a dress rehearsal for Taiwan, obviously a third geopolitical conflict would be something that would generate a lot of volatility. So from a monetary policy standpoint, I think the Fed did a really nice job yesterday of communicating that they're not ready to cut rates, obviously, in July, but they, you know, September looks pretty good. They're going to be data dependent. Remember, between now and the September meeting, we have two more jobs numbers. We have two more inflation prints. And so it's really interesting. We will get both of those.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Now, there's one important differentiation, which is that NVIDIA and these companies are making money unlike some of those Dot-Con companies that we're in the red. But it just doesn't feel healthy that there's only a handful of names kind of driving this rally. Geopolitics, I mean, we've got two global conflicts happening. Obviously, who thought the Ukraine, Russia war would still be going on. And just in recent days, we've seen an escalation in kind of the conflict between what call it Israel and Iran because Israel is obviously fighting everybody from Hamas to Hezbollah to the Houthis in Yemen, all obviously are funded and backed by Iran. And now that you're starting to see some of these assassinations happening on Iran's soil, the temperature is definitely up there. I think that you can't rule out a third geopolitical conflict in.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“As we look at macro, I've been doing a lot of traveling the last couple of months and meeting with our investors and seeing prospective investors. And I'd say, you know, I always like to take a little survey at the end of the meeting. You think we're going to see more volatility in the second half of the year or less? And I mean, I don't think I had a single person that thought there would be less volatility. You have an equity market that's run quite a bit. You have a tremendous amount of concentration, obviously, in the equity market, something like, you know, the top 30 companies in the S&P 500 are 53% of the overall market. Like that, that's not healthy. The largest five, you know, Microsoft Apple, Amazon, NVIDIA, and Meta make up about 25% of the S&P 500. We haven't seen these levels of concentration since the dot-com.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“11th year, you get the bill for your protection that you haven't used in 10 years. Investors from time to time just think.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Hopes that if there was make money in the relative value sense of these stocks are not going to do as well. But more importantly in a market downturn, they would be very profitable from having all of these shorts. There are tail risk protection funds that buy way out of the money options in the hopes that there will be a big payoff or convexity if something bad happens. The challenge with a lot of, particularly option strategies is what we call the bleed, right? So you're paying premium to own that protection year after year. Think of it as you bought a beach house and you have to get flood insurance, right? There was a hurricane last year, you're going to rush out to buy that flood insurance and you're not going to care what you pay for it because you want to have that protection. But imagine that it's been 10 years since the last hurricane and you get your”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Losing money. And so we're providing, once again, that hedge in their portfolio. Now, we haven't talked about it, but speaking of option strategies, right? I mean, a lot of portfolio managers will use options to effectively provide that hedge in their portfolio, right? It doesn't take a genius to think that if you buy a bunch of put options on the market, that if the market goes down, your holdings will lose money, but those put options will make money and create a hedge. There are plenty of people that do option overlays or they buy volatility. You can do that just by investing in buying the VIX futures contract as an example so that if it goes up, you would be profitable. There used to be hedge fund strategies that were called dedicated short bias, where managers would go out and find kind of what they thought were the worst names and they would short them in.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Assets like stocks, chances are they're selling off. If their flight to quality asset or perceived safety assets like we talked about fixed income in some cases, gold, certain currencies like the Swiss franc, the Japanese yen, sometimes the US dollar, depending on where the crisis is, investors are selling risky assets like stocks. They're buying those safety assets like bonds, gold, and certain currencies. And so as volatility expands, markets are moving. And that's that amazing environment where our models are able to then detect those movements, get us into those trades very quickly, and hopefully have some significant gains that we can monetize over a week or two. And, you know, when you think about it from a portfolio standpoint, those are the environments when many of our investors are.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“So we don't invest in options. It's a question that we get quite a bit when we're described as a long volatility strategy. I mean, at the very core, you know, once again, pull up a chart of the VIX, right? When things happen, right, as in, we've talked about a lot of different things, right? You know, a global pandemic, a new geopolitical conflict or war starting, inflation the global economy. All of these things that are unexpected create volatility, right? So something happens, the market doesn't have priced in. And if it's of a magnitude where people are adjusting their positions, you're going to see volatility spike. When that volatility spikes, what are markets doing? Markets are breaking out of recent ranges. So if they're risky.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Right, and that is an interesting strategy of taking a private equity approach to public markets. Of course, there are elements of private equity that you cannot bring that, you know, you're not going to have a controlling interest. You're not going to be able to make management changes. You're not going to be able to pay a giant dividend to yourself. You probably aren't going to be able to use the same leverage. So it's difficult. Michael, I want to close on a topic by tying together a few topics we've talked about. You talked about how your strategy at Quest, and I suppose we were talking about the flagship fund, AQL Alpha Quest original, is exposed to volatility. So when I think of that, of strategies that benefit from volatility, classic example is a put option on the stock market. It benefits from the stock market going down. It benefits from realized volatility if it realizes if they bought it at the implied volatility of 20 and it realizes 30, they make money from that. And then they make money from the implied volatility because the implied volatility is going to go up. Do you invest in?”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Well, I mean, obviously, I've read the same articles that you have that some of the biggest players in the world are looking for ways to give”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“And private investments definitely have their place, and they have historically performed well. I'm seeing some news articles, and I'm sure you're probably more privy to this than I am, of private investments, people wanting to put them in retail hands and in some cases in an ETF. Is that nuts? I mean, putting a private credit instrument, a private loan to a company that's not going to be paid off in six years into an ETF and unlike a high-yield bond, you know, these things don't trade.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Of the large private equity and debt managers. That could be a challenge and could be potentially a regime shift in the future. But when I talk to investors, I just try to make sure that they're going into private market investing kind of eyes wide open, understanding kind of both the benefits as well as some of the risks.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“People have the fallacy that they don't go down, public markets go down, you don't get a private equity statement for three to six months. So there's a significant lag. And as a result of that, you don't see it like you see with CNBC on in every office, the market's down 2%. The market's down 4%. No one is reporting those types of numbers on their private holdings. And so it fools people into thinking that the value of their portfolio is stable and not declining. And so I think that's another real risk that if there is just a downturn in the economy that we see valuations going down, the public markets go lower. Obviously, the value of private companies are going to go lower as well. And people then don't start to see those eye popping returns from.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Pretty short time horizon to redeem funds in my space, usually the redemption cycle is monthly. So it's plenty of time if somebody needs to get liquidity. That's not easy to do in private market investing. There have been a couple of recent examples over the last few years where U.S. pension funds have had to exit a chunk of their private equity. And in many cases, they were taking huge haircuts. We're talking 20 to 30 percent reductions in the value of their investment for somebody in the secondary market to kind of take on that position and give them an exit door. So I just worry that, you know, with the euphoria and the returns that people were chasing in that space, I think it's a great asset class. I just think that maybe people are a little overextended and that could create an issue.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“It's a great point. I mean, over the last five to ten years, there's been an absolute explosion in private market investing. And listen, up until recently, I think the returns were fantastic. The momentum that's generated by all the money coming into the space and valuations getting bit up, I'm sure helped that to a certain extent. I guess my greatest concern is really liquidity because as we know private market investing traditionally is a 10-year lockup. Obviously they're calling capital at different times and in some cases when they exit a particular investment, you're getting capital back. So it's not 100% locked up. But oftentimes you're not getting money back when you need liquidity in the portfolio. And unlike an investment in a macro fund or even just going up and buying a portfolio of stocks, you can get liquidity in many cases anywhere from intraday out to three months, which is a”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Which is a very good sharp ratio. In some cases, though, the strategies that the multistrats are allocating to, they're looking for sharp ratios in some cases north of three. And so you're getting a lot more return by taking less risk. The caveat to that is that that's assuming that all of those relationships and markets stay very, very closely correlated. And that was my point, that when they break down, now risk and volatility elevates in the marketplace. And oftentimes those strategies lose money. And so in a shock, in a macro event where markets are moving in all different directions, your sharp ratio that you felt really good about and you've put a lot of money into that trading strategy turns around. Very, very quickly as your profitability goes away and your risk or your volatility goes up pretty dramatically.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Know sharp ratio is effectively taking the return of the strategy, backing out or subtracting the risk-free rate, which you could get to just put your money, let's say in treasuries and not take risk in the market, and then dividing it by the volatility of the strategy, right? which is kind of a proxy for risk. So let's use a simple example. If your strategy is making 15% per year and we're going to subtract 5% because you can get 5% or close to it in a T-bill right now, so that means that once we back that out, your strategy is making about 10%, right? We'll kind of call that your, it's like your alpha above what you could get for, you know, doing nothing. And then if your volatility of the strategy is about 10% per year, then you're dividing 10% by 10%. And that's the sharp ratio of that strategy would be 1.0.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Right, so the sharp ratio is how much reward you get for a unit of risk. So the higher the sharp ratio means more reward for risk, but the higher the sharp ratio, i.e. the more quantitatively attractive it is to the quants, actually the more negative skew it has, meaning the greater the tail risk is meaning, you know, 98% of the time you're going to make a lot of money in steady fashion, but that 2%, you're just going to go bankrupt. That's what you mean.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Well, I mean, it goes to what we were discussing earlier, and it's the reason that most of these strategies are negatively skewed, right? Because when you think about it, they're almost doing trend following on top of portfolio managers. When a pod or a PM is making money, chances are they're going to allocate more capital to that team or person. And that, once again, think about that risk management protocol we talked about down two and a half. I cut you in half down five. I show you the door. That means someone who's losing money is going to have money pulled from them. And so effectively, what they're doing is chasing higher sharp ratios at the PM level in an effort to boost their sharp ratio at the fund level. And what we've seen is that there's a very high degree of correlation between the level of sharp that you have and your negative skew vis- ⁇-vis”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“I guess it's just that when you have so many different strategies, one strategy is working, you get to allocate more towards that. One strategy is not working. You get to pull it away. And that is a way to generate returns.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“And so you really have to be generating some strong returns for people to be willing to pay those fees. And I think, once again, some of those kind of cornerstone funds that have been around for years continue to generate very impressive numbers. And that's why they're some of the largest in the world. There will probably be some of these multistrats that have launched in the last five to ten years that don't perform as well. The capital walks out the door. And then obviously the expenses are still there. So we may see some of those funds closing in the years to come. If you look just at performance across the space this year, there's a pretty big gap between the top performers and the bottom decile, if you will. And investors won't put up with that for long.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Saying that you had to have at least 500 million under management in order to kind of start to tick the boxes and have enough revenue to kind of pay for all the things that you would need in order to pass the test. I haven't seen that study updated, but I have to think that that number is getting closer to 750 or a billion. And once again, some of these multistrat spinouts and launches are showing that the bigger getting bigger. So listen, at the end of the day, like anything, it's a doggy dog world on Wall Street and multistrats do because they're expensive to run, charge some of the highest fees out there. Usually at $2.20 and then some sort of a pass-through structure, meaning additional expenses like data and people in tech are passed through to the investor. That can be as high as 7 to 8 percent in some cases.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Where he said, Hey, I want to go out and run my own fund and not be under the Millennium Umbrella. So they said, okay, great. We're going to help you get set up. We're going to basically give you seed capital. We're going to continue to allocate to you outside of the Millennium Umbrella. And then you can go out and raise additional investor capital. And so it's becoming harder and harder for kind of the little guys, if you will. to try to break into the space because let's face it the amount of talent, data, and infrastructure that you need in order to run a real institutional quality hedge fund or alternative investment company that institutional investors will embrace, that you'll pass due diligence so that they'll want to allocate capital to you. That bar just keeps getting higher and higher. I remember Citibank put out a piece years ago.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“And I think that because they've grown to this magnitude, they've also gone out and they vacuumed up a lot of the talent on the street. So, you know, when I started this business, two or three folks who, let's say, worked at Goldman Sachs together could circle up $5 to $10 million of friends and family capital and go launch a hedge fund and hopefully kind of grow it over time. You don't hear about that anymore. There really aren't that many kind of brand new from nothing launches in our space in large part, most of the new funds that come about are usually spinoffs of the multi-strat. So, you know, one that's been in the media, Bobby Jing from Millennium, just did one of the largest spinouts that the industry has ever seen, multiple billions.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Listen, multi-strats have been around for a long time, and they have performed some of the biggest ones, names like Millennium and Citadel have done very well historically. They've got a great risk-adjusted return, even with some of the highest fees in the hedge fund industry. I think that when you think about, I go back to me explaining how as an allocator, you've got to put together all of these different strategies to create a solid portfolio. Well, having somebody at one of the world's largest hedge funds who has been doing this for, you know, 30, 40 years has picked some of the best portfolio managers and teams and is able to assemble a portfolio that then the investor, all they have to do is write a check and sign a DDoc is a lot easier than having to go out there and try to do it on your own.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Tooth and they need to think about taking some profits. If something happens, a headline because of the geopolitical conflict happening in the Middle East that sends the market lower, that could be a trigger to have all of these kind of nervous investors to kind of then rush for the door. And the way you have to think about that is imagine 100%.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“It's possible that a delevering of people that are trading statistical arbitrage could lead to a market sell-off just because basically people are seeing large movements that are unexpected in the markets. So maybe somebody that's not even trading equity market neutral long and short the market, maybe somebody that's just long the market is seeing a real pickup on volatility. They're seeing relationships that they know to kind of they feel confident in breaking down. And so it creates fear, right? It creates anxiety. The two most powerful emotions in trading, right, are fear and greed. And when fear sets in and people think, wow, we've had a good year. It's actually one of the reasons that I think the market's a little on edge right now is that we've had a great year from a long equity perspective and people in some cases think maybe it's a little long in the”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Thank you. And I could totally understand if everyone is long risk, if everyone is five times levered the NASDAQ and then the NASDAQ goes down more than 20% or even goes down a little bit and there's a cascade of selling that forces more selling and there's a fire sale into a falling market on leverage. It's a disaster. I understand that. But when talk about the trade, so we can obviously were just making these examples up, but whether you're talking about Bank of America goes up more than JP Morgan so that people are short Bank of America and long JP Morgan or we can make it NVIDIA and Apple. I mean, you take your pick, but company A, company B, everyone's crowded the same position. But how does that cause system-wide risk if it's just if it's not long the market in general? They're not long everything. They're just long, the spread between NVIDIA and Apple for two hours. Like how does that?”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Not closing, it's widening. So those managers are now losing a lot of money on those trades. And as they take them off and delever the book, then what it's doing is almost think of it as dominoes. It's kind of knocking into other managers who are losing money. They're delevering. And so as the dominoes fall, unfortunately, it just gets worse and worse.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Will go up on that too. So I'm going to go buy related names. So, in some cases, maybe that stock doesn't come back to the basket. Maybe the basket rises to the name. Either way, you've positioned yourself to effectively be able to kind of capture the closing of that statistical relationship. And so the risk that I was referring to is that from time to time, like these things work in what I would call normal markets. But from time to time, things happen, obviously, in the world that are not normal. And oftentimes when the not normal happens, let's say one of the magnificent seven, you know, completely blows an earnings call and the stock is down a huge amount and the people start making other decisions in their portfolio, potentially delevering. Now those very tight statistical relationships or correlations start breaking down. And as they break down, the spread is.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“It'll go long a couple of stocks in its basket. And then what you're waiting for is for that basically that relationship or that spread to close. So then maybe an hour later, the CFO comes out and says, hey, I know there are rumors in the marketplace that we're going to be acquired, but that's just categorically false. And immediately, right, that stock that's up 2%. those people that had jumped into it start selling it and it goes right back down to maybe where the the rest of the market is or potentially that stock went up because um maybe they had an earnings call and they said something uh who knows maybe they mentioned the word ai or they said something about their your business and their industry that got people excited and and basically started buying it and now the rest of the market kind of catches up and says well you know if if google's up on that maybe microsoft”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“And so investors start buying that stock as opposed to its kind of partner or pair. And so all of a sudden, that stock, you know, let's say goes up two percent on the day. And all of the other stocks in its industry are only up 1%. We'll say that the S&P is up percent on the day. And so the general market is just kind of dragging those stocks up with it. Immediately, all of these computer models around the world are going to say, hey, something is happening. This stock is up more than its group or its basket. And it shouldn't be. And so typically what the models will do very quickly when it identifies this potential arbitrage opportunity is it will put a short position on that stock that's up two percent and then it will go long either the most related or correlated name that's only up 1% or potentially”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Well, I mean, first off, I mean, Statarp, which is the nickname for statistical arbitrage, has been around for many years. And in many cases, it can be a very profitable strategy. What we have seen historically is that there are statistical relationships in the equity markets. And so if you look at names that may have, you know, they're in the same sector or subsector, very similar business lines. you know, typically speaking, they're going to be very correlated. And so what these models do, obviously, and they're doing it, obviously, across a thousand stocks and using automation and technology, they're just looking for any sort of a blip on the radar where two names that almost always trade in lockstep, you know, maybe there's a rumor that one of the companies is going to be taken over.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Unwinds our model effectively takes the opposing position. So it goes along the traditional shorts, it goes short belongs, and it creates a basket approach to being short statistical arbitrage. And, you know, obviously we launched it last year. We haven't seen one of these unwinds yet. But the last big one just happened in 2020 when the pandemic hit. And I think a lot of investors really, unless they had a direct exposure, missed it because they were so focused on obviously COVID and their own personal health and safety. But if you have an allocation, a lot of these stat type strategies, you know that when the markets sold off, the statistical correlation between a lot of names, sectors, baskets, and factors broke down. And we saw deleveraging kind of happening in that space. And so we don't know if that's going to happen today, tomorrow, next month or next year.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“I'm going to allocate capital to a PM or a pod. If you go down two and a half though, two and a half percent, I'm going to cut your allocation in half. If you go down 5%, I'm going to show you the door. And so using that kind of risk management framework on these allocations, you can imagine if a trade is crowded, oftentimes they're also think about statistical arbitrage. They're using leverage to effectively leverage up these small arbitrage opportunities in order to make profits that investors would be willing to pay fees for. And so crowded trade that's levered. And then they start to lose money and you see that kind of systematic deleveraging happening tends to create some big moves. So we've recently created a model we call tactical anti-crowding that looks for these kind of crowded moments and statistical arbitrage. And then when they...”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“In assets, you know, fast forward to today, it's getting close to 60 multi strats and their assets are north of $370 billion. So the industry has more than doubled over the last, call it five to six years. And we know just from our friends who work there and from interviewing researchers and portfolio managers who have come from or at the multistrats that all of them are allocating a significant amount of capital to equity stat arms. So we're concerned that that space may be getting crowded and that, hey, going back to August of 2007 and there have been multiple iterations of these mini quantes where there's just too much crowding and then as people start to lose money for whatever the reason they're very quick to delever their portfolios, you know, the joke and the multi-strats.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“Short term momentum plays as let's say people are rushing out of large caps and moving into small caps or you're seeing a rotation across other kind of equity style factors, there are momentum. And in many cases, it's multi-day so you can imagine we can deliver that same positive skew that we do in the futures markets inequities. And it actually, you know, I think it's great that we're talking about this because it kind of brings up I think what's a pretty significant risk in the markets right now, which is that there are a lot of people who are trading quantitative equity stat right now. You think about the multistrat hedge funds, the quote unquote pod shops. Back in 2018, there were about, I don't know, call it 25 to 27 of those funds. And they were managing about $150 billion.”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT
“No, actually, historically, we were futures in FX, and about three years ago, we started to add single stocks into the portfolio in a small way. I think it's something that the CTA industry has embraced for many years is that the same systematic kind of quantitative approach that we take to trading futures and currencies can be applied to individual equities. I think it really has been part of kind of the call and diversification of our industry. And so we're excited about kind of what we're doing there. It's about 5% of our portfolio and it's an equity market neutral approach. So obviously, you know, equal amount of longs and shorts obviously protect us from larger kind of beta moves in the market. And really what we're doing is looking for”
2024-08-19 · Forward Guidance · The Strategies & Risks In Quant Trading | Mike Harris · IDENTIFIED FROM THE TRANSCRIPT