"A wise American hedge fund manager once said..." | quant trading clips
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Macro for stock pickers:
Point72's founder Steve Cohen
"Well, I mean, you can't ignore the macro, okay?"
"Whether it's the US economy or the world economy, that's ultimately gonna reflect company earnings and company stock prices, right?"
"So if the world's going into recession, clearly, you know, companies are gonna have a tougher time. If things are expanding, they're gonna do well."
"If Russia invades Ukraine, well, guess what? The price of gas and price of oil may change."
"So you constantly gotta be monitoring the global macro and the US macro, because things are always dynamic."
The small-cap effect that wasn't:
AQR's Managing Director Peter Hecht
"We would have questioned the validity of small decades ago."
"Some of the early papers that brought the small cap effect to light in the academic literature had data errors in the paper."
"There were positive signs that should have been negative signs on returns."
"Small caps on average beat large caps, but they're higher beta. Bill Sharpe told us in a rational economy, higher beta stocks should have higher average returns."
"We found there was no small cap effect."
"You could have just levered the larger stock to the same beta level and outperformed the small cap."
The narrative edge is judging which early signal becomes consensus.
Former IMC & Jane Street trader & founder of @freeportmarkets,
@Lihong062 explains
"By the time it's on, I think Bloomberg, Economist, you know, Wall Street Journal, like it's already been on Twitter for like over like 48 hours typically."
"If you're following the right AI researchers, do you know if they're legit?"
"One, whether what they're saying is true and should inform your trading, and two, whether what they are saying is going to become popular and is actually gonna move prices, right?"
"That is something that I think requires a lot of experience and judgment, and, uh, it, it's not a solved problem."
"for some of our kind of friends at more well-connected funds and semi-analysts at like more well-connected places, like a lot of times you can get narratives at the conversation level days or weeks before they are- surface on Twitter at a large scale."
"By the time it's on Twitter, there probably is still some edge. There's a lot of edge at the conversation stage, I think, like through lived experiences. And I think by the time it's, like, you know, on Bloomberg, it's probably, like, almost no edge at all."
Stock picking is one third of the job:
Balyasny's founder Dmitry Balyasny
"If you're trading equities: stock selection, timing, and money management, risk management. Those are the three vectors."
"So the selection of the security that you're trading is one third of that. And I think people focus on that as like 95%. But that's one third."
"In a hedge fund, the reason you get paid a lot of money if you're doing well is you get the other two thirds right, consistently."
"Saying something's gonna go up a lot or down a lot, and at some point you're right on Amazon, at some point you're wrong on Amazon, that's kind of the retail world. But in the institutional world, you're paid for making money consistently."
"You got to get the timing right, and you got to get the money management right, or the security selection doesn't really matter that much."
From quarterly 13Fs to real-time positioning:
Citadel Securities' Technology COO Jeff Maurone
"Who owns what stock? What changed today?"
"Historically, the way to solve this problem is to look at 13F filings. But they happen once a quarter, and they're 45 days delayed."
"It is impossible to use that as a source of information to understand what's changing every single day."
"If you start with that as a foundation, and then you smartly look at all the flows in the markets every single day, you can move from quarterly to real time."
"If you were following just the 13F filings for Procter & Gamble, you would have seen in the late summer that value investors went from being under-owned to being over-owned in that symbol. And you would have found out about that in August."
"Following that every single day, you would have seen that shift from under-owned to over-owned ten weeks earlier."
The appraisal ratio test:
AQR's Managing Director Peter Hecht
"To me, the most potent thing is to actually calculate alpha relative to their current opportunity set, which is the portfolio they hold."
"By having access to this, do I improve the return of your portfolio without taking more risk?"
"And that can actually be calculated. It's called an appraisal ratio."
"If some theoretical exercise says it has alpha but doesn't improve your portfolio, it's dead to you as far as I'm concerned."
The strongest alpha can disappear when you size the trade.
Partners at Versor DeWayne Louis and Nishant Gurnani explain:
"So in EM markets in general, in EM equity index futures, there isn't as much liquidity, so we don't run as much risk in EM markets as we do in developed."
"We run 12 developed on a cross-sectional basis, 12 EM on a cross-sectional basis."
"oftentimes the alpha signals will be strongest in these less liquid, smaller markets."
"that alpha is sort of a mirage because you can't actually trade those markets in, in the level of size and volume you want without moving the prices meaningfully."
"And so the key insight is incorporating a very thoughtful portfolio construction process that takes into account tra-transaction costs and liquidity in real time to, to account for, for the position sizes you take in these markets."
Idiot one year, genius the next:
Balyasny's founder Dmitry Balyasny
"And the allocator might say, well, yeah, that's fine. But this other fund that trades equities and macro, they're up 35 percent."
"And then you'd look at what they were doing, and they're 80 percent directional and super concentrated and have a ton of beta."
"Then you come in the next year and the market was down 20 percent, that same fund is down 30 percent and hopefully you're up 12, and then you look like a genius. But you're doing the same thing that you were doing the previous year when you looked like an idiot."
"So we try to just stick to the knitting and put up consistent returns, as opposed to being overly influenced that at the moment the market's exuberant, next month it's depressed."
NO CRYING IN THE CASINO retweeted
Ex-Goldman Oil Derivatives Trader Simran Singh (@0xturbanurban) on the day oil went to -$37.63, why every trading strategy is momentum or mean reversion, & losing $3.12M in a single day.
Simran Singh (Goldman Sachs oil derivatives trader, on the desk when WTI went negative | GSR Head of DeFi Trading | Now CEO & co-founder of @MonacoTrading)
"You can't touch an interest rate curve, but you can smell a barrel of oil."
We cover:
- Pricing oil options at 300-400% vol the day WTI went negative
- How Goldman's oil desk monetizes client flow (80-85% was producers hedging)
- How producer hedges turned a market-risk problem into a credit problem in 2020
- Why market making is really a bet on mean reversion
- The perp funding trade: anyone can do it, very few can do it in size (15% carry even on the CME)
- "My size your price, or your size my price"
- Who's printing money right now: OTC hedging in power, compute & AI
- Why there's no venue to trade electricity, and how Monaco wants to fix that
Highlights:
00:00 Intro
00:58 The day oil went negative: April 2020
06:07 How Goldman oil traders monetize client flow
18:30 Every strategy is momentum or mean reversion
22:53 Goldman to GSR
28:26 The perp funding trade
34:48 Sell-side to buy-side
42:27 The AI complex & agentic trading
48:21 The Monaco Exchange thesis
53:13 Decentralizing futures listings
Seeing short squeezes coming:
Citadel Securities' Technology COO Jeff Maurone
"How do we see short squeezes coming before it's too late? We get these questions all the time from our clients."
"If you look at retail flows in equities and you look at retail flows in options and then you look at institutional short interest, there's enormous predictive signal around when an event like this could happen."
"Rather than fulfilling data requests, we pre-compute these every day."
"Breakout probability fuses all of these data into a view that gives investors every single day the likelihood of a short squeeze in a given symbol. We do it for every symbol, we do it every day."
"Avis faced a short squeeze earlier this year."
"If you were paying attention to this tool, you clearly knew this was coming weeks in advance, and if you were particularly concerned about it, you could have known it months in advance to prepare."
The AI trade gets discerning:
Citadel's CEO Ken Griffin
"Look, I think this market is actually experiencing people doing research."
"Which companies in that story are choke points in supply chains that will have abnormally high margins?"
"But in some sense, I'm just going to buy them all. I'm going to buy the hyperscalers. I'm going to buy the chip companies. I'm going to buy businesses that make things I've never even heard of five years ago in Korea and Taiwan and Japan."
"And now, we're reaching a point where people are becoming more discerning."
"We do realize that we are seeing extremely high margins in DRAM and MLCCs, in areas where there are real supply constraints, but people are now starting to look out two years, three years: how long is this going to last?"
AI's margin fork:
Balyasny's founder Dmitry Balyasny
"At the moment, while AI is making us much more productive and efficient, we haven't let go of one person because AI has automated their job. We're just hiring more AI people."
"But if you look out five years from now, is that still going to be the case? Probably not. Some jobs are going to get automated."
"If you think of a typical company where there's a lot of folks doing very bureaucratic type of things, a lot of pretty mundane tasks, all that stuff is gonna be automated. I don't know if it's in a year or in five years, but somewhere in that timeframe."
"If you're a company that can really harness that and you could produce your products, your services at a much lower price point, and you figure that out ahead of the competition, your margins might explode to the upside."
"On the other hand, if everybody in your space is doing that, maybe your margins are actually gonna collapse, because everybody's gonna drive down pricing."
"Everyone is focused very much on the next quarter. But if you think out two, three, four years, how's this space going to look?"
No tracking error, no outperformance:
AQR's Managing Director Peter Hecht
"Tracking error is the volatility, but it's the volatility of the relative return, your return versus a benchmark."
"A tracking error of 3% means, if you think it's a normal distribution, you're going to have a return that's going to be either 3% ahead of the S&P 500 or 3% behind the S&P 500 with roughly a 66% probability."
"If you want to beat the benchmark, if you want to try to add value, you have to take tracking error."
"You can take bad tracking error, right? That's with a manager that does not have a good process for determining what's an attractive security or an unattractive security."
"The more tracking error you take gives you more possibility for beating the benchmark, but it also means you might actually lag the benchmark by more when your manager experiences bad luck."
AI as an amplifier of human intuition:
Citadel Securities' Technology COO Jeff Maurone
"It's very easy to dismiss them as efficiency gains or operational gains. It's 99% cheaper to produce software."
"When the mindset shift goes from purely automation to starting with a spark of human intuition around what moves markets and amplifying that, magical things are happening."
"Maybe historically, as an analyst covering several hedge funds, you read a few 13F filings to see how holdings changed."
"But now, you might have an agent reading every single 13F filing the moment it comes out, compares with every historical filing in history, builds essentially every portfolio in the market, shocks every portfolio daily and maps the risk across the entire market."
"That amplification of human intuition about the way markets work is the source of alpha here."
"Human intuition is the spark that starts it, and AI and agents amplify it."
When a position goes against you:
Point72's founder Steve Cohen
"I mean, listen, you gotta keep processing information."
"You gotta remember the way we do things, one stock is part of a bigger portfolio."
"Let's say you own a stock and it's going down, you may have shorts against it, protecting you. We run long, short, we don't necessarily just run long."
"You gotta recheck your work and, you know, make sure that you're not missing something. I mean, you can't know everything."
"And you may want to add if you've done all the work and decide, hey, this is a great opportunity."
NO CRYING IN THE CASINO retweeted
Hedge Fund Manager David Orr (@orrdavid) on why he backed a game show winner with no credentials:
"I think that people aren't actually focused on just the simple answer of, like, what's this guy's edge. They're not willing to look outside and pick unusual people."
"In our case, one of our guys won a TV game show."
"He doesn't have any credential at all. He didn't work in any of the big shops or banks or anything."
"I'm fine hiring him because his personal account Sharpe for a few years is two point something, so we'll give him a shot."
"You could be a delivery guy, but if you're killing the market, I'll give you a shot. It could be anybody."
Hedge Fund Manager David Orr (@orrdavid) on why he’ll back a delivery guy over a Harvard grad, as long as the track record is real.
David Orr runs Militia Capital, a ~$480M hedge fund. ~50% annualized, Sharpe 2.
“If you didn’t go to Harvard, they’re not going to give you money. They’re gonna lead you on for years.”
We cover:
- Edge is just reps. He's placed a few hundred independent bets every year since 2019, more in one year than a lot of hedge fund managers get in a decade.
- The two-hour rule: if he can't decide on a stock in an hour or two, he skips it. When a trade goes against him, he quits. "The market said I'm wrong, I'm wrong."
- 500 positions in his partition and zero notes. Some of his best shorts are down 40% and he's forgotten what the company does.
- The Gogo lesson: he spent 100 hours on a short and was right on the fundamentals (it's now $2), but it ripped to $20 first. All that research made him stubborn on the way up.
- The AI risk system: it groups the book into custom baskets like "Banks Done Right" and "yield traps," recalculated daily. A 25% bet can quietly become 45% in two weeks.
- How Militia recruits PMs: 95% of track records are junk, and one cherry-picker ran 30 accounts and sent the best one. The PMs who make it include a game show winner, a Spanish government worker and a programmer, with 0.15 cross-correlation.
- The best short seller in the world, quietly: 40% a year short only for years, and he still gets a tiny allocation at his fund.
- Why multi-managers' real business is marketing. Collect $2B a year in fees on $100B and it's "mission accomplished," whatever the returns.
- The long/short tax trick: harvest losses on losing shorts, and never cover one that's down 90%. No tax is due until it's delisted, which can take 10 years.
- $150M raised from one email asking LPs for $100M. He says he could raise a billion but won't, and admits they "must have gotten at least somewhat lucky."
- His AI stock map: hyperscalers locked customers into take-or-pay deals at ~35% return on capital. If compute prices crash 80%, the end customers get wiped out, not the hyperscalers.
- Is investing 99% talent? For big alpha, almost entirely. Pod shop alpha is teachable, maybe for 1 in 50 people rather than 1 in 10,000.
Highlights:
00:00 Intro
00:44 How AI custom factor baskets track dynamic correlation in levered portfolios
03:24 Sourcing non-consensus PM talent and verifying live Sharpe track records
07:24 Structuring carry and tax deferral to attract elite proprietary traders
12:50 Why institutional multi-manager platforms fail to back pure alpha
20:22 The two-hour research limit: Avoiding sunk-cost bias in short selling
27:58 Momentum screening vs deep value: Why top longs hit new highs
29:40 Why traditional finance books fail and what operator biographies teach
37:16 Why rapid technological adaptation beats traditional economic moats
39:26 Analyzing the AI trade: Why hyperscalers offer superior downside protection
44:57 Internalizing stock borrow desks to maximize net-of-fee fund compounding
55:25 Avoiding confirmation bias and why shorting revenue growth fails
01:01:42 Pod shop leverage factories vs raw discretionary alpha generation
01:07:12 Unplugging from market narrative feeds to preserve independent conviction
Quitting trend following at the worst time:
AQR's Managing Director Peter Hecht
"In 08 it actually did well. So that's actually why everyone got in after 08."
"If trend following is based on underreaction to news, if there isn't much news, there is very little to underreact to."
"A lot of people got out of trend following after holding it for 10 years and it was sort of mediocre, and they got out in 2021, and in 2022 the industry was up, let's call it 30% or 40%."
"Sometimes holding it with equity beta is a way to force discipline."
"If you're just holding managed futures standalone and it's just having two, 3% returns, you're sort of like, ah, is that a good use of my capital?"
Slugging vs. hit rate:
Balyasny's founder Dmitry Balyasny
"If you contrast it with high frequency trading, which is a hit rate type of business, you're going to have 99% of your trades going to be profitable or a tiny loss. You've got to do tiny, tiny, tiny, and repeat, repeat, repeat."
"We have 170 investing teams at the moment. When you hire an investing team, chances are, depending on their track record, maybe 75% of them will wind up working out."
"If you can control the risk, you might lose 10 million, 20 million, 30 million on somebody who doesn't work out, but the ones that do work out, they'll hopefully be with you for 10, 20 plus years, and you might make hundreds and hundreds of millions off of them."
"In order to enable the slugging, you have to have very well-defined risk boxes within which people will operate, to enable them to bet on the things that they're really good at betting on and try to exclude as much of the other stuff as possible."
"For every strategy, we'll have stops, vol targets, vol limits, stress limits, liquidity limits, et cetera."
Answer every question before it's asked:
Citadel Securities' Technology COO Jeff Maurone
"For 50 years, the process of sequencing amino acids into folded proteins was a bottleneck on biology research."
"Researchers would spend quarters, sometimes years, folding just a single protein until Demis Hassabis and the team at DeepMind fundamentally changed this."
"Using models, they reduced that process from years to call it six or seven weeks."
"Even though they were using a model to accelerate the process, it still worked first in, first out."
"Instead of working that way, why not just fold every single protein we've ever seen?"
"More than 200 million proteins folded, became an incredible resource that changed biology forever."
"Using what is essentially an early form of agents, rather than answer questions when they arise, but to preemptively answer every possible question before it is asked, is one of the real emerging ways that we are seeing AI and agents being used to achieve incredible results."
AI and the holding-horizon problem:
Balyasny's founder Dmitry Balyasny
"I don't think you can replace any for the foreseeable future, but I think it's a really good adjunct."
"Markets are quite different. And the longer your holding horizons, the more different they are."
"For that stuff, you can use AI to really automate your trading because the rules are quite clear, like what causes a stock to go up in the next 30 seconds? Well, it's more buyers and sellers."
"But over a longer period of time, is this employment number that comes in hot good or bad for equities? Well, that depends on the environment that you're in."
"When a company misses their earnings number, but the revenues are better, is that good or bad? Well, it depends."