Wednesday, 23 June 2010

a non-EUR rant

Well the Raven thought that he would feel the need to rant about the EUR, but that's not such a big urge today, Mrs. Raven has been bored by it several times already this month.

However, the Raven did read an 'interesting' interview with Vic Niederhoffer today (VN as he won't be able to spell it correctly twice) based on the premise of interviewing people that have been spectacularly wrong. Indeed VN has been wrong, in huge size twice, blowing up his fund in 1997 and 2007 after some huge gains. One might speculate that he'd have learnt or been in denial, however he instead had some strange analogies to make and basically wished he'd taken less risk.

Traditionally the Raven would mention the Kelly Criterion at this point and may well do as an appendix, but his main point is in conjunction with another lame article (whose title he has already forgotten) that was essentially a collection of 'good trader habits'.

This article certainly didn't deviate from the well trodden and essentially useless path of stock phrases and ideas. "let your winners run, cut your losers quicker, don't get emotional and bet the right size". These sorts of articles frustrate the Raven as they portray investing and speculating as a simple rule based skill that is applicable across lots of asset classes, time frames and regimes, which it just isn't, as anyone that is going to be successful for a long period of time should recognize. Now the Raven dislikes empty criticism that doesn't replace or better that being criticised, so in that vein;

1) Sound risk management is key

Now that doesn't mean having fancy systems or whizz bang models necessarily. That means the hard non-formulaic work of making sure you don't bet too much of your capital, that you realize what you're betting on and how much you can lose, how quickly and in what scenarios. Also kicking the portfolio with random ideas, historical ideas, likely scenarios, the kitchen sink, anything you can throw at it and making sure that you can live to fight another day. Now for the ironic glib formulaic statement; correlation is ephemeral, and if a hedge can hurt you when you need it help you, it probably will. As is a realization that other people are thinking exactly as you are, so don't rely on liquidity to get you out of your book, that my friends is a recipe for an offer only market, Oshkosh truck size spreads when you do find a bid and a PB that has a penchant for s&m.

2) Don't bleed to death

This second point is really point one again, however its for those investors who are "smart", i.e., skeptical of the market, who predict 9 out of 2 crashes. The Raven once heard a very glib quote, 'we don't believe in VaR or any of those statistical risk metrics, we realize how flawed they are, we understand what risk is, and the amount of money you can lose". You may think this is precisely right, especially in absolute space terms, however risk is more like not being able to play the game again, and in a roaring bull market as an absolute fund returning L+100bps will rapidly lose the firm capital and your ability to bet, heaven forbid you really loaded up on protection and lost money, well then you can guarantee that you'll have your capital pulled before your cheap options pay off to make you the next Paulson.

Its interesting that VN says in his interview that in general people are too skeptical or too gullible and that he believes he is the latter. One would have to agree given the fact that he's blown up spectacularly twice after huge performance. The Raven agrees, however both of these problem characteristics tend to cause blow ups and bleed outs because of not paying enough attention in just making sure that you're still around to trade tomorrow, and next week, and next year, etc, etc.

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