STREET DOGS

From Man Institute:

Some [hedge funds] skip predicting the real world as a determinant of prices by just focusing on the prices themselves

– they are “technical” not “fundamental”. It seems perverse that markets can be predictable in a way that the real world is not; that there might be eminently sensible ways of managing money without being quite sure what it is, or what it’s worth. First, this may be because prices themselves crystalise outcomes which we can’t predict independently.

Secondly, this may be because of the wonderfully paradoxical fact that under uncertainty, as market participants we behave in more predictable ways; the more uncertain we are about what to do, the more predictable our behaviour becomes.

We believe in situations like this that momentum works.

The claim to usefulness of such funds has been widely challenged in recent years: “the alpha’s all gone!” Part of the problem may have been the stability of markets: they weren’t trendy enough. Or, competition has made trends so noisy that the valuable trends are now only to be found in markets which are hard to access. We may hear a whole lot less of these complaints for a while.

Who needs bonds when you can buy hedge funds? Simply put, two very common precepts in the technical trading world look as robust as anything now. They have worked well recently both in the Long-Short space and also in the land of Long-Only. First, run gains, cut losses. If we are to see very big moves, this one should act to point the book in the right direction for them at least. Second, adjust market exposure inversely to market risks. We believe that if markets go up, volatility will likely fall, so market exposures will tend to be increased in rising markets, but shrunk if we sink back.