ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

title i think says it all...except for this:

DISCLAIMER: as opposed to most of the ask poster X about XYZ, i am nowhere NEAR qualified to give all, or likely even most, of the answers.

i do hope though, that the questions will expose holes in my understanding or prompt others who have the requisite knowledge to chime in.

i'm not averse to research so if a question is asked that require such i'll happily do it if i deem it worthy.

i hope this post will prompt some people to ask questions that they would otherwise be unwilling to post as a thread on their own. Or, if somebody wants to go over a concept that would hijack another post, this would be the place, imo.

Evan, if this is inappropriate, lemme know but i think it will prove valuable to everyone.

[/Disclaimer]

Now, for my qualifications: 2 years as an Economist for the dept. of labor in DC. MBA in finance w/ concentration in mathematical finance. 6 months intense training with top 3 macro-strategy hedge fund. now have time on my hands as i search for my next job...which is why i've been so active in this forum as of late. i'd like to stay sharp and keep learning.

let'er rip [img]/images/graemlins/smile.gif[/img]

Thanks,
Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

Here is a n00b question that maybe you can answer.

As I understand it, a company goes public to raise capital.
Now let's say I buy 10% of the share so I'm basically owning 10% of that company. So how is it that some years after the IPO, the company can decide to "release more shares" to raise more capital. Surely that's not fair to the current shareholders because once they do that I own less than 10% of the company.

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
Here is a n00b question that maybe you can answer.

[/ QUOTE ]

i'll sure try. any questions ranging form n00b to expert are appreciated.

[ QUOTE ]
As I understand it, a company goes public to raise capital.
Now let's say I buy 10% of the share so I'm basically owning 10% of that company. So how is it that some years after the IPO, the company can decide to "release more shares" to raise more capital. Surely that's not fair to the current shareholders because once they do that I own less than 10% of the company.

[/ QUOTE ]

as i understand it, owning 10% of the company doesn't give you a say large enough to prevent future dilution of your holdings should the company choose to raise money via additional shares.

it may not be "fair" in terms of your ownership %, but it may be best in terms of the value of your holding. the management team (presumably) feels this influx of capital will serve the shareholders' interest. the management team also likely has a share of the company so they are diluting their own interest as well.

if others have better insight, please chime in.

hope this helps,
Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

think about it this way.

you own 10 shares out of 100. the company is worth $10 mil. your shares are worth $1 mil.

now the company decides they need $2 mil to develop a new product. they decide to sell more shares. to get $2 mil, they sell 20 shares. but now the total value of the company is $10 mil + $2 mil (in reality, probably more, since the new project should increase the company's value by more than the investment).

so now you own 10/120 shares of a $12 mil company. your shares are still worth $1 mil+.

so while you own a smaller percentage now, the company is worth more which should (more than) make up for your reduced stake.

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

Dcifr,

Do you enjoy being an economist. How much do you have to deal with internal/external DC politics in your job?

Also, how do you categorize your economic viewpoint?
Neoliberal? How about supply vs demand side? How much government regulation is needed/good?

Thanks a bunch.

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

stinkypete,
aha! of course. Forgot that the money raised belongs essentially to the stakeholders.

Thanks you both for the explanation.

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

Barron

To what do you ascribe the ability of a major macro firm to make money in the markets (i.e. quant-type analysis, Soros type "feel" and fundmamental analysis, superior access to information, etc)

Also...why aren't you returning there.

Lastly, do you agree that economists (that was my major) are "non experts" as described in the Black Swan and basically worthless, particularly as it relates to prediction (I subscribe to this belief, FWIW).

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

If you don't mind, along the lines of your background, as I am now studying for the GMAT/preparing to enter grad school in the next 2 years:

Where is your MBA from? FT or Part time?

Did you work while pursuing MBA?

If you could go back, would you change anything about your MBA process?

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
Dcifr,

Do you enjoy being an economist. How much do you have to deal with internal/external DC politics in your job?

Also, how do you categorize your economic viewpoint?
Neoliberal? How about supply vs demand side? How much government regulation is needed/good?

Thanks a bunch.

[/ QUOTE ]

well, i was an economist from 2001-2004. longer story not important. i'll get to your Q now.

i did enjoy it. crappy pay. supplemented by poker. otherwise i couldn't have lived at 21st & F.

i wrote 2 papers. one almost published. i had to deal with politics only so much as it determined WHAT my job was.

for instance, bill clinton issued Executive order 13125 which aimed at including more asiam american & pacific islanders in govt programs. my job was to determine whether they had statistically significant less access (for one reason or another). therefore, politics determined my job.

another example was my second paper about unobserved demand for health care. would a small business subsidy increase overall health insurance coverage by more than the cost of the subsidy? well on one hand, possibly, but on the other hand, possibly not. small businesses tend to have smaller #s of employees, younger employees, lower income employees, and less educated employees (some overlap there) which all contribute to a lower probability of accepting health insurance given an offer. so possibly not. i had to model that and it was pretty cool (mostly b/c you don't observe people's take up rates when they don't get offered so goooo HECKPROB [img]/images/graemlins/smile.gif[/img])

again, politics determined my job. i didn't have to deal with it though, just do it. NIKE baby!

in terms of my viewpoint, i dont really know. nobody really asks me that since i got out of DC where i was (probably the only) registered utopian socialist.

i used to say "im socially libral, fiscally conservative, geopolitically realist, and internationally economically libral." i dont know to what extent that holds true anymore. for the most part it probably does though.

i don't remember much about supply vs. demand side since it has been a while since i had to answer that.

now, in terms of govt regulation, i think int'l trade should be liberalized (as you could have probably guessed) so in that sense it is not so good. man, i suck at this. i dn't really know enough about instances, costs & benefits & studies to have a solid opinion on this. my instinct says though that govt regulation is probably un-necessary in almost all instances by typical definitions. in terms of SEC type "regulation" it is definitely needed but probably not optimal at present.

did you have a specific sector in mind?

lemme know and please feel free to critique or ask me to go into more depth anywhere (where possible that is...or provide thoughts and i'll try to expand)

Thanks,
Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
Barron

To what do you ascribe the ability of a major macro firm to make money in the markets (i.e. quant-type analysis, Soros type "feel" and fundmamental analysis, superior access to information, etc)

[/ QUOTE ]

well i have a vastly biased opinion here so bare with me. macro funds have an advantage iff they can find a methodology in which they can specialize and keep improving. my former fund generated buy/sell decisions through incremental improvement of very detailed and highly integrated algorithms that were thought about constantly & backtested thoroughly. very impressive stuff going on there. part of it did relate to the data, but it wasn't the access. it was the processing. we backfilled so much stuff for analysis it was crazy. and i learned a rediculous amt in a sickly short time.

the advantage was in that we traded only in some of the most liquid markets but incorporated fundamental value, momentum, & inter-market action into the buy sell "signals" better than almost all other participants. our expected risk adjusted return was 1.0. fittingly, we generated about a 1.0 historical information ratio over about 15 years. (i say we for simplicity. i obv am no longer included in "we")

so i guess i ascribe the advantage to "quant" analysis properly implemented & constantly thought about for improvement in addition to a vastly superior processing of information.

"feel" only comes into play during the improvement process. if you can have "feel" you should be able to write down what it is gives you that feeling. once you do that, you can test it, think about it, test it some more and eventually program it into the process you've developed. Alchemy of Finance was almost unreadable once into the experiment. i put it down after i gleaned what i could.

[ QUOTE ]

Also...why aren't you returning there.

[/ QUOTE ]

well firstly, i was let go so returning isn't an option. if given the choice though, i'd do it again (i.e. work there and get fired). i think this will probably work out best as the requirements there didn't play optimally into my strengths. i can't wait to see what lies ahead.

on the plus side, i learned a lot (vast understatement). more importantly though, i think i learned a good process for improving and constantly learning.

further, my managers will all give me solid recommendations and the fact that many highly successful people worked there and left or got fired (including former fed economists) means that it doesn't say much about the quality of the employee, only the fit with the firm.

[ QUOTE ]

Lastly, do you agree that economists (that was my major) are "non experts" as described in the Black Swan and basically worthless, particularly as it relates to prediction (I subscribe to this belief, FWIW).

[/ QUOTE ]

well i haven't finished or gotten far enough in black swan yet but i think i understand your and taleb's beef.

in terms of prediction, they are pretty worthless. but ironically, the use of the fundamental drivers that come from understanding what is trying to be conveyed by predictive models can be hugely useful in trading. especially where there are non-profit seeking participants.

the fed, though, does a pretty good job as far as managemnet goes and they use predictive models to think about this stuff, so that is aplus for "economists."

but yes...i think that they are for the most part "non expert" experts. i love the FDR quotation: "bring me a one handed economist!" (i think it was FDR)

as always, let me know if i can go deeper anywhere or if i missed your points.

thanks,
Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
If you don't mind, along the lines of your background, as I am now studying for the GMAT/preparing to enter grad school in the next 2 years:

Where is your MBA from? FT or Part time?

[/ QUOTE ]

washington university in st.louis olin school of business. full time.

[ QUOTE ]

Did you work while pursuing MBA?

[/ QUOTE ]

well, poker (duh!). but also as a part time employee for a start up firm that valued intellectual property (i did modeling for the founder).

[ QUOTE ]

If you could go back, would you change anything about your MBA process?

[/ QUOTE ]

hmmm. good one.

i think i would have used my alumni more. i don't think i took full advantage of that resource. partly my school's fault. mostly my fault.

while there i was told a story about a classmate's friend who went to harvard. this person wrote over 1,000 letters to alumni. when asked why, he said "well, i got all these resources, why not use them."

Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
stinkypete,
aha! of course. Forgot that the money raised belongs essentially to the stakeholders.

Thanks you both for the explanation.

[/ QUOTE ]

thank pete, he got it. i missed it.

but you're welcome lol.

Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

SM,

i'd love to field more in depth questions from you. i've been quite impressed by your contributions to this forum.

Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
Here is a n00b question that maybe you can answer.

As I understand it, a company goes public to raise capital.
Now let's say I buy 10% of the share so I'm basically owning 10% of that company. So how is it that some years after the IPO, the company can decide to "release more shares" to raise more capital. Surely that's not fair to the current shareholders because once they do that I own less than 10% of the company.

[/ QUOTE ]

There are a couple important difference here. If they are "releasing" more shares, they are only selling shares that were already issued. Your percentage ownership changes not one iota. The only difference is who holds those shares. That's what happened with Google. They just sold more stock that was held by venture investors and other insiders.

A different situation is when a company files to register new shares. When those shares are sold, you are diluted. It's true that as was posted above that you still own that money that paid for the new shares, but not for long. When a company has to issue new stock, it's usually their last resort. It usually means they were unable to borrow the money they need. The cash from the stock sale is usually burned in short order. Be wary of this sort of situation.

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

If you thought you were the best (pure/skilled/technological/whatever) trader in the world with $10B AUM, but could only trade in one market, what would you trade?

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
more importantly though, i think i learned a good process for improving and constantly learning.


[/ QUOTE ]

Is this general reading / seeking out smart people or anything new / interesting?

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
[ QUOTE ]
Lastly, do you agree that economists (that was my major) are "non experts" as described in the Black Swan and basically worthless, particularly as it relates to prediction (I subscribe to this belief, FWIW).

[/ QUOTE ]


well i haven't finished or gotten far enough in black swan yet but i think i understand your and taleb's beef.


in terms of prediction, they are pretty worthless. but ironically, the use of the fundamental drivers that come from understanding what is trying to be conveyed by predictive models can be hugely useful in trading. especially where there are non-profit seeking participants.


the fed, though, does a pretty good job as far as managemnet goes and they use predictive models to think about this stuff, so that is aplus for "economists."


but yes...i think that they are for the most part "non expert" experts. i love the FDR quotation: "bring me a one handed economist!" (i think it was FDR)


as always, let me know if i can go deeper anywhere or if i missed your points.


thanks,
Barron

[/ QUOTE ]

and just to be clear, by haven't finished, i meant havn't started.

and by haven't started, i mean i've just now read enough to know that i'll want to answer your question again.

the tentative answer in general still stands: economists (i.e. us), can't predit anything significantly important.

we, both humans and economists though, seem to be doing quite well, so far.

Barron

PS- i can't seem to be able to learn how to spell rediculous. ridiculous just doesn't ever look write [img]/images/graemlins/smirk.gif[/img].

PPS- the invention of fire and the "number" zero are pretty cool black swans, though the invention of fire i don't think is ever thought of as predictable.

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
[ QUOTE ]
more importantly though, i think i learned a good process for improving and constantly learning.


[/ QUOTE ]

Is this general reading / seeking out smart people or anything new / interesting?

[/ QUOTE ]

my vote is general reading... and randomly encountering smart people...edit: in terms of new/interesting, i'd guess no

Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
[ QUOTE ]

Also...why aren't you returning there.

[/ QUOTE ]

well firstly, i was let go so returning isn't an option. if given the choice though, i'd do it again (i.e. work there and get fired). i think this will probably work out best as the requirements there didn't play optimally into my strengths. i can't wait to see what lies ahead.

on the plus side, i learned a lot (vast understatement). more importantly though, i think i learned a good process for improving and constantly learning.

further, my managers will all give me solid recommendations and the fact that many highly successful people worked there and left or got fired (including former fed economists) means that it doesn't say much about the quality of the employee, only the fit with the firm.

[/ QUOTE ]

Barron, what was the basis for your being fired? (not for surfing 2+2 from work, I hope)

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

Barron,

Thanks a lot for answering my questions!
Im studying for my final in International Political
Economy, and this part made me laugh a lot:
[ QUOTE ]
im socially libral, fiscally conservative, geopolitically realist, and internationally economically libral.

[/ QUOTE ]
Of course, if push comes to shove I might have described
myself the same way so I shouldn't laugh too much [img]/images/graemlins/smile.gif[/img]
As I discussed in the thread I made about choosing a career,
I kind of want to be an economist, and it is nice to see
that you can work in D.C. and not have too much politics,
although it still influences some things. (I still couldn't
live in D.C. though)

Thanks again.

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

Thanks for the answers about your MBA, appreciate it barron.

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]

Also...why aren't you returning there.

[/ QUOTE ]

well firstly, i was let go so returning isn't an option. if given the choice though, i'd do it again (i.e. work there and get fired). i think this will probably work out best as the requirements there didn't play optimally into my strengths. i can't wait to see what lies ahead.

on the plus side, i learned a lot (vast understatement). more importantly though, i think i learned a good process for improving and constantly learning.

further, my managers will all give me solid recommendations and the fact that many highly successful people worked there and left or got fired (including former fed economists) means that it doesn't say much about the quality of the employee, only the fit with the firm.

[/ QUOTE ]

Barron, what was the basis for your being fired? (not for surfing 2+2 from work, I hope)

[/ QUOTE ]

well we're getting a bit off track here and this isn't supposed to be "ask barron about his personal life"...

but short story i was in a position where it was about 30% analytical research type stuff and 70% client service/project management type stuff. i wasn't good at the latter but i was great at the former. their interview process heavily weights the analytical and personal discussion group interactions so despite me "sailing through" the interviews, i wasn't cut out for the position itself.

further, i wasn't getting up to speed with the 70% stuff quick enough and after 6months it was apparant it wasn't likely that i would.

i had lunch w/ 2of my 3 manager people and they've been great and are looking forward to being references for me. in addition they have put me in touch w/ some friends at other similar places.

hope that answers your Q sniper. turns out i was not fired for surfing 2p2...theres always next job though.

i will though say that this will be the last personal/non-finance question i'll answer.

thanks,
Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

Sorry Barron, wasn't focused on the personal aspect. The takeaway should be that in any job there may be aspects that don't play to your strengths, and it pays to determine the true nature of a job during the interview process. Hopefully that's a useful lesson to some of the people here heading into interviews.

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

barron,

wrt managing a portfolio of assets, how do you view the relative importances of predicting returns, predicting covariances, and optimizing the portfolio? how is this influenced by the relative difficulties of each of these and the amount of error even doing them well imparts on the process?

thanks,
ed

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

Barron

Thanks for taking the time to do this. Can you ellaborate a little more on this?

[ QUOTE ]
i think i would have used my alumni more. i don't think i took full advantage of that resource. partly my school's fault. mostly my fault.

[/ QUOTE ]

I am 26 and a math teacher. I am looking at a career change and an MBA seems to be my best bet. I have 5 years of solid management experience with good references. I am trying to decide weather I should go full time and leave my job which would take 1.5 yrs to complete. Or part time which would take 3 yrs to complete. I have the benefit of summers off which may give me a chance at an internship or extra credit hours to shorten the time length. My concern is that taking the part time track would give me an MBA (focus will be finance) at close to 30. I worry that I will not be as marketable due to my age (maybe this is just a mid life crises fear). Any thoughts suggestions? I will likely still do it part time as I do enjoy my job and I can’t justify the loss of income to my self. TYIA!

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

What is your personal approach to understanding what is going on with the market well enough to trade profitably? Is it reading the Economist and WSJ, talking with informed friends, or some other process?

Thanks for your help.

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

1) You are a standup guy for disclosing the adversity of not fitting at that job...I am a big fan of candor and disclosing weaknesses.

2) You write this:
in terms of prediction, they are pretty worthless. but ironically, the use of the fundamental drivers that come from understanding what is trying to be conveyed by predictive models can be hugely useful in trading. especially where there are non-profit seeking participants.

the fed, though, does a pretty good job as far as managemnet goes and they use predictive models to think about this stuff, so that is aplus for "economists."


I am not sure I understand...to the extent that understanding the efforts of predictive models are useful in trading...doesn't it follow that they themselves need to be predictive? How can understanding what is being attempted by non-predictive economists lead to a predictive strategy?

SM

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
barron,

wrt managing a portfolio of assets, how do you view the relative importances of predicting returns, predicting covariances, and optimizing the portfolio? how is this influenced by the relative difficulties of each of these and the amount of error even doing them well imparts on the process?

thanks,
ed

[/ QUOTE ]

the answer varies if you are talking about a passive long only portfolio or an active managed portfolio.

in the latter, it depends on the leeway you have as a manger (can you short? use leverage? use derivatives?)

i'll take the passive portfolio since it is easier to explain.

the most important thing is thinking about how an asset class HAS VARIED in the past by itself (and why), how it HAS VARIED in the past against everything else in your portfolio (and why), and most importantly, how you logically think they can and will vary in the future both individually and together.

predicting returns is far easier in the asset class example. an easy way to go about it is to assume each asset class has a sharpe ratio of between 0.2 and 0.3 (which makes sense and is backed by data)...all asset classes except commodities that is (i'd give them a 0.10-0.15).

then you simply back out the "expected return" of that asset class from the volatility estimates you've worked hard to think about (if ever you're not sure, you can increase/decrease these estimates & see the effect on your expected portfolio #s).

from there, you can optimize your portfolio. most people do this with a simple mean-variance optimization (i.e. run the calcs one time). i think this is a big mistake since the optimal allocations are highly sensitive to small changes in correlations & variances. therefore, you'd want to do a 10k run monte carlo with ranges around each of those factors (and since the "expected return" is a function of "expected volatility" that will back itself out). the ranges you can tweak as well to be wider around assumptions you are not as sure about.

in this way, you can try to minimize big and common mistakes in constructing an optimal portfolio.

this is FAR more complicated if you're talking about an actively managed portfolio.

hope this helps. did i asnwer your question? or did you want me to give an opinion as to which part of this is the hardest?? imo that isn't all that important b/c all of it needs to be done right .

Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
Barron

Thanks for taking the time to do this. Can you ellaborate a little more on this?

[ QUOTE ]
i think i would have used my alumni more. i don't think i took full advantage of that resource. partly my school's fault. mostly my fault.

[/ QUOTE ]

I am 26 and a math teacher. I am looking at a career change and an MBA seems to be my best bet. I have 5 years of solid management experience with good references. I am trying to decide weather I should go full time and leave my job which would take 1.5 yrs to complete. Or part time which would take 3 yrs to complete. I have the benefit of summers off which may give me a chance at an internship or extra credit hours to shorten the time length. My concern is that taking the part time track would give me an MBA (focus will be finance) at close to 30. I worry that I will not be as marketable due to my age (maybe this is just a mid life crises fear). Any thoughts suggestions? I will likely still do it part time as I do enjoy my job and I can’t justify the loss of income to my self. TYIA!

[/ QUOTE ]

im sorry.

i'm not a recruiter and i dont know about this. but i can tell you that at the age of 26, i was on the left end of the age distribution at my MBA.

Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
What is your personal approach to understanding what is going on with the market well enough to trade profitably? Is it reading the Economist and WSJ, talking with informed friends, or some other process?

Thanks for your help.

[/ QUOTE ]

it involves reading and thinking. more thinking and then researching. then talking to people smarter and more experienced than me. the latter is part of the reason why i posted this thread. i'd like to get some tough questions from smart people and really have to try to dig into them.

reading WSJ is more of data collection and keeping up with the news. reading the FT is more about getting into analysis and seeing what is going on in the world. and reading the economist is the absolute best because it gives great articles about finance & global political & economic factors that make you think and relate it all together.

you'll never know everything, or even close. taking it a piece at a time and seeing what happens when you add the next piece both in expectation and then checking with data is the way to learn imo.

overall, you should always ask yourself 3 questions when thinking about something in finance:

1) what has happened that caused this thing i'm thinking about to change drastically? and why?

2) what COULD happen that could cause this thing i'm thinking about to change drastically? and why?

3) what does this tell me about the overall thing i'm thinking about? and how sensitive is this thing to other factors it depends on, or that depend on it? and why?

from there, you can then try to get a sense of what that thing is and that understanding should help you see the signs of change in the wind before others who don't thinkn that hard about each aspect that they learn.

is that what you were looking for? let me know if you need/want clarification on anything.

thanks,
Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
1) You are a standup guy for disclosing the adversity of not fitting at that job...I am a big fan of candor and disclosing weaknesses.

[/ QUOTE ]

thanks. i appreciate your kind words.

[ QUOTE ]

2) You write this:
in terms of prediction, they are pretty worthless. but ironically, the use of the fundamental drivers that come from understanding what is trying to be conveyed by predictive models can be hugely useful in trading. especially where there are non-profit seeking participants.

the fed, though, does a pretty good job as far as managemnet goes and they use predictive models to think about this stuff, so that is aplus for "economists."


I am not sure I understand...to the extent that understanding the efforts of predictive models are useful in trading...doesn't it follow that they themselves need to be predictive? How can understanding what is being attempted by non-predictive economists lead to a predictive strategy?

SM

[/ QUOTE ]

there are a few points above butt he main one seems to be "how does using a non-predictive model help in trading since it doesn't do a good job of predicting?"

the reason imo is that the model may have some important factors that do get a relationship correct. but as it gets more and more complex, it starts to fall apart. depending on the precision you want your predictions to have, this can be fatal.

but if you want to dig into a specific relationship, say between X and Y. you have two models, one that predicts X and one that predicts Y. both models are rarely right.

but what happens when you want to trade X against Y? well that diff trade can be constructed by taking the things in X that also affect Y and the things in the Y model that also affect X. (this is easier said than done obviously).

what you then have, is a model that doesn't try to predict the absolute level or X nor Y but a model that can give you a signal as whether the difference between X and Y will increase, decrease, or possibly stay the same.

so understanding a non-predictive model can still be useful in trading as above.

some predictive models though do a pretty good job. the fed's models for instance seem to work rather well in terms of economic management, but not so well in predicting specific micro #s.

thanks again for your participation and kind words. i hope this helps convey the way i was thinking about the answer i provided above. let me know if it doesn't (things may land differently for you than how i intend them when i write).

thanks,
Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
If you thought you were the best (pure/skilled/technological/whatever) trader in the world with $10B AUM, but could only trade in one market, what would you trade?

[/ QUOTE ]

obviously the market im the best at trading. no "best in the world" trader is best at all markets.

Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

The most important things to know before going to work for a global long/sort fund?

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
The most important things to know before going to work for a global long/sort fund?

[/ QUOTE ]

i don't know. never worked for a global long/short fund. basic financial calcuations i'd think you should know though. portfolio math and the like.

Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
[ QUOTE ]
barron,

wrt managing a portfolio of assets, how do you view the relative importances of predicting returns, predicting covariances, and optimizing the portfolio? how is this influenced by the relative difficulties of each of these and the amount of error even doing them well imparts on the process?

thanks,
ed

[/ QUOTE ]

the answer varies if you are talking about a passive long only portfolio or an active managed portfolio.

in the latter, it depends on the leeway you have as a manger (can you short? use leverage? use derivatives?)

i'll take the passive portfolio since it is easier to explain.

the most important thing is thinking about how an asset class HAS VARIED in the past by itself (and why), how it HAS VARIED in the past against everything else in your portfolio (and why), and most importantly, how you logically think they can and will vary in the future both individually and together.

predicting returns is far easier in the asset class example. an easy way to go about it is to assume each asset class has a sharpe ratio of between 0.2 and 0.3 (which makes sense and is backed by data)...all asset classes except commodities that is (i'd give them a 0.10-0.15).

then you simply back out the "expected return" of that asset class from the volatility estimates you've worked hard to think about (if ever you're not sure, you can increase/decrease these estimates & see the effect on your expected portfolio #s).

from there, you can optimize your portfolio. most people do this with a simple mean-variance optimization (i.e. run the calcs one time). i think this is a big mistake since the optimal allocations are highly sensitive to small changes in correlations & variances. therefore, you'd want to do a 10k run monte carlo with ranges around each of those factors (and since the "expected return" is a function of "expected volatility" that will back itself out). the ranges you can tweak as well to be wider around assumptions you are not as sure about.

in this way, you can try to minimize big and common mistakes in constructing an optimal portfolio.

this is FAR more complicated if you're talking about an actively managed portfolio.

hope this helps. did i asnwer your question? or did you want me to give an opinion as to which part of this is the hardest?? imo that isn't all that important b/c all of it needs to be done right .

Barron

[/ QUOTE ]

you came pretty close to what i was looking for ... i was mostly just looking for what your philosophy was wrt portfolio management in general.

to make the example a bit more complicated though, say that instead of allocating between asset classes (where looking at returns/covariances is somewhat trivial), you're managing something like stock picking or an arb strategy that may be going away, where returns and covs are likely to change from historical, and you may be subject to highly non-normal return distributions and "black swan" type unpredictable events.

knowing that everything needs to be done right, but doing any of them right will take all the time/effort you have and then some, and still may not have a definitive answer, on what step of the process would you focus your energy?

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

Barron,

I'm in college and have read that interviews will often ask about particular stocks or how the economy is "doing" in general. The former seems pretty easy to research and understand, but how do you concisely explain the state of the entire economy? Pick a few major recent events and their effects? Talk about market direction and interest rates?

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

Barron,

Where do you feel "knowledge accumulation" is more efficient - entry level at hedge fund or reading everything you can get your hands on at home + occasionally seeking out smart people to discuss / learn? I ask this b.c. I am beginning to see a parallel with the entry level job as a more advanced+focused extension of college, which is a highly inferior learning mechanism b.c. there are too many stupid demands and distractions for optimal learning(i.e. GPA, people who love to contagiously waste time, and classes on English literature).

Assume you have financial flexibility from poker that the pay from any job is irrelevant, as well as enough $$$ to start a small personal fund when the "knowledge accumulation" has hit a desired level -- and then make back any losses through poker. The stop would be pretty tight the first time [img]/images/graemlins/wink.gif[/img]

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
Here is a n00b question that maybe you can answer.

As I understand it, a company goes public to raise capital.
Now let's say I buy 10% of the share so I'm basically owning 10% of that company. So how is it that some years after the IPO, the company can decide to "release more shares" to raise more capital. Surely that's not fair to the current shareholders because once they do that I own less than 10% of the company.

[/ QUOTE ]

The certificate of incorporation filed with the secretary of state in the state of incorporation lists the maximum number of shares the corporation is authorized to issue. (Any balance sheet of a publicly traded firm will list the number of shares authorized, the number issued, and the number outstanding at the balance sheet date.)

The board of directors has the power to vote to issue more shares up to the authorized number without first obtaining shareholder approval. However, to increase the authorized number of shares requires shareholder approval (as defined in the certificate of incorporation).

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
barron,

wrt managing a portfolio of assets, how do you view the relative importances of predicting returns, predicting covariances, and optimizing the portfolio? how is this influenced by the relative difficulties of each of these and the amount of error even doing them well imparts on the process?

thanks,
ed

[/ QUOTE ]

the answer varies if you are talking about a passive long only portfolio or an active managed portfolio.

in the latter, it depends on the leeway you have as a manger (can you short? use leverage? use derivatives?)

i'll take the passive portfolio since it is easier to explain.

the most important thing is thinking about how an asset class HAS VARIED in the past by itself (and why), how it HAS VARIED in the past against everything else in your portfolio (and why), and most importantly, how you logically think they can and will vary in the future both individually and together.

predicting returns is far easier in the asset class example. an easy way to go about it is to assume each asset class has a sharpe ratio of between 0.2 and 0.3 (which makes sense and is backed by data)...all asset classes except commodities that is (i'd give them a 0.10-0.15).

then you simply back out the "expected return" of that asset class from the volatility estimates you've worked hard to think about (if ever you're not sure, you can increase/decrease these estimates & see the effect on your expected portfolio #s).

from there, you can optimize your portfolio. most people do this with a simple mean-variance optimization (i.e. run the calcs one time). i think this is a big mistake since the optimal allocations are highly sensitive to small changes in correlations & variances. therefore, you'd want to do a 10k run monte carlo with ranges around each of those factors (and since the "expected return" is a function of "expected volatility" that will back itself out). the ranges you can tweak as well to be wider around assumptions you are not as sure about.

in this way, you can try to minimize big and common mistakes in constructing an optimal portfolio.

this is FAR more complicated if you're talking about an actively managed portfolio.

hope this helps. did i asnwer your question? or did you want me to give an opinion as to which part of this is the hardest?? imo that isn't all that important b/c all of it needs to be done right .

Barron

[/ QUOTE ]

you came pretty close to what i was looking for ... i was mostly just looking for what your philosophy was wrt portfolio management in general.

to make the example a bit more complicated though, say that instead of allocating between asset classes (where looking at returns/covariances is somewhat trivial), you're managing something like stock picking or an arb strategy that may be going away, where returns and covs are likely to change from historical, and you may be subject to highly non-normal return distributions and "black swan" type unpredictable events.

knowing that everything needs to be done right, but doing any of them right will take all the time/effort you have and then some, and still may not have a definitive answer, on what step of the process would you focus your energy?

[/ QUOTE ]

ok so lets just be explicit here.

we are now talking about running an actively managed portfolio in one asset class, lets take an M&A Arb strategy in equities.

keep in mind that we are now branching into a specific area in which i am not educated.

in order to construct an optimal portfolio we need the following:

1) variance estimates & ranges around them: st.dev
2) covariance estimates and ranges aroudn them: correlations
3) expected return estimates and ranges around them.
4) as large a sample of profitable trades one can find.

the latter is fairly abundant in today's climate. the main problem is constructing the optimal capital allocation to these trades (while at the same time minimizing transaction costs). lets assume we are dealing with only liquid securities (not a small assumption for many big managers).

in this case, first and foremost i'd concentrate on getting the trades right. that is #4. the more trades you have, the better off you are. for M&A arb, that is probably pretty hard considering that a sudden rise of risk aversion will drive correlations of deals not getting done up. if you're betting some will get done and some won't then you're better off (again, im no expert here. i've never worked for an M&A arb fund nor do i know specifics about how they tackle this). so once you have those bets i'd do the following.

just throw some base st.dev, corr, & exp. ret #s in there and create a monte carlo'd portfolio of these trades.

then, see where the biggest risk gets allocated (keep in mind you need to think about RISK allocation and work backwards to capital allocation). then i'd want to see what would happen to my portfolio if the worst thing that could ever happen in this bet happened (i.e. if i was betting on a convergence in share prices lets say one went bankrupt and the other hit the jackpot). could i blow up? if yes, take some risk away.

do the same down the line with all trades.

we get to see how difficult this is especially since we just started with some base #s. the main thing i'd want to make sure i could do is weather the worst and still have capital to make it to the best. that is the key with alpha strategies that are concentrated and highly susceptible to black swan type events imo.

you can never plan on everything.

could the top 3 fund i worked for blow up? $30b down the drain? sure. if all correlations of their 150+ trade types went to 1 and they all went precisely against them (some would have to move up , some would have to move down since most of the portfolio is in diff trades not directional trades). the goal is to make sure that no one bucket or area can hurt you disproportionately. you want to be able to gain the best of it while weathering the worst of it.

specifically, if you have a very high conviction bet (high expected return and to you, a low st.dev) and it moves against you without changing the fundamentals/flows etc. you want to be able to put even more into that trade or at LEAST not have to pare back your position.

in most cases, i think people allocate too much to those 5-15 killer trades than they should b/c if they moved against you you'll be in a position of reducing risk exposure not putting more on.

i know i didn't give you a clear answer, but it isn't something that is clear. you need to think about everything but the MOST IMPORTANT thing to think about is what could cause you to blow up or have to pare back positions given some basic assumptions. the accuracy of those assumptions aren't as important as making sure your portfolio of alpha trades can stand up to some big moves against it and still be in a position to profit from your views.

and you DEFINITELY need to be thinking about any big move that happens while you're managing this portfolio. if your trade moves 1.5st.devs against you, are you still sure you have the fundamentals right? did you miss something? SHOULD you pare it back b/c you've missed something?

LTCM doubled down when they *should have* realized that all they were doing is buying the riskier asset while shorting out the risk-free asset...in every market. in every conceivable way. then they got into areas in which they didn't have an expertise, or an edge, where big moves would KILL their portfolio.

not once did they go through the above practice whole heartedly. it was a failure of risk management above all else. i know you can critique my analysis here b/c hindsight is 20/20...but they never did really get into that type of risk management assessment of their bets. that one thing could have helped them weather the storm.

you dont want that type of thing to ever happen to an active portfolio.

hope this helps. can somebody who actually manages an active portfolio liek the one above (m&a arb, or equity type long/short) chime in? am i missing something?

thanks,
Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

thanks. i was looking more for your thought process than a clear answer, so that was perfect.