Earlier, we showed that for the record 6th year (!) in a row, the average hedge fund will not only underperform the wealth effect policy tool better known as the S&P 500, but will, for the first time since 2011, generate a negative return for the year.

Why? The answer once again takes us to the fundamental problem with central-planning: broken markets unlike anything seen in history. It is shown on the chart below, where we see the average hedge fund generated a negative 1% YTD return (and 0 on the “and 20” portion of PM comp), which in terms of strategies, is only surpassed by the nearly 5% drop in event-driven strats, and the nearly 10% tumble in the EURUSD.

What about the other end? Well, with the S&P in third position of all actively-managed strategies (because the S&P is actively managed by the Fed, the ECB, the BOE, the BOJ and now the PBOC), there are only two strategies that according to Goldman, have outperformed the broader market:

• a basket full of Goldman’s Hedge Fund VIP stocks, and paradoxically, just above it…
• a basket of the stocks that most hedge funds love to short.

That’s right: for the 3^rd year in a row, the best performing, highest-alpha strategy is to go short the most hated names and just sit back and collect those performance fees, because when nothing makes sense, the worst shall be the first.

Incidentally, this is precisely what we said not only in September 2013 in “Presenting The Best Trading Strategy Over The Past Year: Why Buying The Most Hated Names Continues To Generate “Alpha” but also the year before that when in September 2012 we said:

…since fundamentals don’t matter in a world where Austrian monetary theory rules (i.e., the only thing that matters is the amount of liquidity entering or leaving the market at any moment), taking advantage of people who still naively believe that there are traces of rationality and efficiency in a market that is broken beyond any slavage value and short the worst names out there, may be one of the few “strategies” that work, besides of course predicting with 100% accuracy what side of the bed Mario or Ben will wake up on.

None of which will stop those who have the attention span of a Princeton or MIT gnat of accusing Zero Hedge of being a endless doom and gloom permabear, when in reality we merely find constant delight in pointing out just how broken this joke of a market has been for the past 6 years, and certainly allowing those habitual gamblers, who are so inclined, to profit from said farce.

It is for their benefit that we once again present the basket of most shorted names: go long these and as long as central planning is in control, one is virtually guaranteed to outperform the vast majority of hedge funds.

And as usual, a word of caution: in a market as broken as this, one’s paper gains can and ultimately well be gone in the blink of an eye, especially once all exchanges break and make withdrawing one’s funds impossible (i.e., a shareholder bail-in). One can be absolutely certain that this will happen just as the central bankers finally start to lose control over the ludicrous bizarro circus they have all created in their all in attempt to recreate the USSR, only at a global scale (for more read How The Market Is Like CYNK)

via Zero Hedge http://ift.tt/11LAeVL Tyler Durden

Democracy ruled…

 

 

Source: Artizans.com

via Zero Hedge http://ift.tt/1z4tkoB Tyler Durden

Submitted by MKTSTK,

This is the first in MKTSTK’s HFT War Stories series. Submitted anonymously by a high frequency trader. Names of people, places, and products have been omitted:

Algo trading has a way of making your hair turn white. Sometimes it’s the wild market action. The response then is to cut risk and keep on trading. The big losses come from avoidable human errors. Those are the losses you might not come back from.

The trading world is increasingly automated. Every year there are fewer human eyes watching the market at any given time. Traders employ algorithms to cut latency and market impact. Dealers find automation indispensable in quoting thousands of different exchange traded derivatives.

If your automation is coded correctly most of the time it saves your ass. Risk management algorithms run on top of trading strategies and monitor underlying markets for signs of trouble — backing your quotes off if necessary. I have been saved by automation on numerous occasions, side-stepping big market moves and allowing me to keep trading when others ran to the sidelines.

When your automation goes haywire, however, that’s when you experience fear and anger in equal, blood-curdling, measures. Usually it’s not an obvious case of turning the strategy on and watching it go crazy, a la Knight Capital. The worst errors are subtle, they lurk in the corners of your strategy’s logic. They could be caused by code you did not write, living in lower level code that interacts directly with the market.

I discovered this risk first hand one day right before the markets closed. I was working with a new tool our developers had created to cut latency. Certain parts of the strategy which had existed within my code should have now been handled by lower level code written by developers. The changes had passed QA testing and were mission ready as far as I knew.

I had been testing this tool out on an obscure exchange listed derivative. Purchasing the contract bought a combination of separate contracts. The tool handled things fine for a week an a half. Then one day I went to turn it off and the strategy went insane, purchasing nearly two billion dollars worth of illiquid derivatives in literally the blink of an eye.

The risk limits I had coded at my level of code were worthless; the strategy launched so many orders at the market in such rapid succession that its PnL and position were not delivered to my strategy logic fast enough to catch. I had hard-coded a maximum of $80 million in risk before the strategy was supposed to kill itself.

HFT has a tendency to put you in these types of situations more often than not. You feel that visceral shot of adrenaline course through your veins. You perceive time, light, and sound as though in a tunnel. Panic must be suppressed, if only long enough to get hedged.

After fear comes anger. WHO THE FUCK DO I KILL? This emotion must be buried. If it isn’t I will lose my job and lifestyle — I might get combination sued by the government whilst given up as bait by my firm to regulators. All for code I did not fucking write, mind you.

Shit, now it was time to get the fuck out of my unwanted $2 billion position. Selling out directly was not possible: the market is too illiquid to reabsorb my gigantic inventory at this time of day. It’s a miracle I didn’t get worse prices. The only answer was to hedge it quickly into a more liquid market that was still open. No time to negotiate on price, I took a similarly large offsetting position in a product that I hoped would hedge me long enough to liquidate.

Now here is where shit got really fun. The product I hedged into was correlated to my unwanted position, but it certainly wasn’t a perfect hedge. This was around one of the debt ceiling farces, so I was shitting myself watching the news for someone from the government to inadvertently fuck me in the ass by causing my hedge to perform badly.

Now that the market was closed I was able to track down the developer who had coded the tool that went haywire. After talking it out and then checking his code, the problem was caused by a change he made yesterday. Because the contract was a combination of other contracts, it didn’t handle getting flat correctly. It kept buying contracts to get flat, not recognizing each fill using the correct multiplier. Thus it kept shoveling bigger orders into the market thinking it was closing out a position. In fact it was in an infinite loop, acquiring contracts until a risk check had a chance to kill it.

In the end, the code was fixed by correcting a minus sign. Me and my junior traders worked out of the position slowly over the course of the next day and only ended up losing around $40,000. HFT being HFT, we didn’t even lose money that day. Even so, it could have been a complete disaster. Every time I turn off a strategy I still get that feeling I am about to get fucked.

via Zero Hedge http://ift.tt/1ukk9fz Tyler Durden

The growing divergence between equity and credit markets this year have seldom been far from our pages (especially how, over many cycles, credit has led and stocks followed at trend turns), and now it appears Barclays also recognizes this fact. As they note, in 2007, as hints of the financial crisis were unveiled, spreads in the high yield market increased sharply. Meanwhile, the equity market climbed to a new record high. Had equity investors heeded the warning being sent from high yield, significant losses may have been avoided… and currently high yield sell signals suggest equity investors should position defensively!

Click image for massive legible version

 

You were warned:

High-Yield Credit Crashes To 6-Month Lows As Outflows Continue

 

High-Yield Bonds "Extremely Overvalued" For Longest Period Ever

 

High Yield Credit Market Flashing Red As Outflows Surge

 

Is This The Chart That Has High-Yield Investors Running For The Hills?

*  *  *

Between a sudden shift to a preference for "strong" balance sheet companies over "weak" balance sheet companies (the end of the dash for trash trade), and this rotation from high-yield to investment-grade, it is clear that investors are positioning defensively up-in-quality ending the constant reach-for-yield trade of the last 5 years.

Why should 'equity' investors care? The last few years' gains in stocks have been thanks massively to record amounts of buybacks (juicing EPS and also providing a non-economic bid to the market no matter what happens). This financial engineering – for even the worst of the worst credit –  has been enabled by massive inflows into high-yield and leveraged loan funds, lowering funding costs and allowing CFOs to destroy/releverage their firms all in the goal of raising the share price.

Simply put – equity prices cannot rally for long without the support of high-yield credit markets – never have, never will – as they are both 'arbitrageable' bets on the same capital structure. There can be a divergence at the end of a cycle as managers get over their skis with leverage and the high yield credit market decides it has had enough risk-taking… but it only ends with equity and credit weakening together. That is the credit cycle… it cycles.

via Zero Hedge http://ift.tt/1vx4elc Tyler Durden

Here we go again.

By now everyone, including 2 year old E-trade babies and Atari algos know, that the only reason the market soared from the October 15 bottom, a move which we showed was entirely due to multiple expansion and thus nothing to do with earnings and everything to do with faith in even more free central-planning liquidity (something the PBOC was all too happy to provide overnight), was James Bullard’s casual “QE4” hint on Bloomberg TV.

Since then Bullard has become the punchline of every financial joke, as it has become far too obvious that the Fed will never allow even a regular 10% correction (October 15 halted the closing market drop at just under 10%).

And now that the market is at ridiculous all time highs and trading above 19x GAAP PE, far above the level when in September the IMF, the G-20, the BIS and even the Fed all warned of assets bubbles, here is Bullard once again, with a fresh mea culpa and a new attempt to jawbone stocks, only this time back down, because as Dow Jones reports, “Bullard Says Markets Misread Him In October Bond-Buying Dustup.”

According to a DJ report, markets were rattled by comments Mr. Bullard made in a Bloomberg interview just ahead of the late October Fed policy meeting. He said the central bank might want to consider extending a bond-buying stimulus that was almost universally expected to end that month.

Then, after the meeting, Mr. Bullard praised the Fed’s decision to end the bond purchases, and again argued in favor of interest rate increases next spring, at a point earlier than many investors and officials expect. There was sense of whiplash: that Mr. Bullard had within a short period shifted gears on monetary policy.

 

In a Wall Street Journal interview Thursday, Mr. Bullard attributed some of the confusion to the fact that many market participants didn’t listen closely enough to what he said. He allowed that monetary policy making has become far more complex and thus more challenging to communicate. But he underscored an underlying consistency to his view, noting what he said about the Fed’s bond-buying program hadn’t altered his long-running view that short-term interest rates should be lifted off their current near zero levels next spring.

 

“If you actually go look at the [Bloomberg] interview and go look at what I said, one of the things I actually said was I’m not backing off my interest rate, my March interest view,” Mr. Bullard said.

 

The idea that it might be a good idea to press forward for a bit longer with bond-buying was rooted firmly in the ominous market conditions that prevailed ahead of the October Fed meeting, the official said.

 

“Global markets were saying there was going to be a global recession. And one way for the Fed to react to that would be to delay the end of [bond-buying] and get more information,” Mr. Bullard said.

 

So according to the brain behind the St. Louis Fed, a 9% drop in the S&P is indicative of an imminent global recession? And, one wonders, what does the subsequent 15% jump “say” about the global economy? Oh wait, Mr. Bullard, is only attuned to the moves down in the S&P, which are due to the market being wrong. However, when the market surges on hopes of more liqufity, the market is said to be right about an economic recovery. 

Got it.

“Maybe global markets would have been right and maybe there would have been a global recession coming, in which case we would want to have plenty of leeway to react to that,” he explained. It would have simply been a “low-cost” insurance policy to keep going with what was then $15 billion per month in bond purchases, get to the December Fed meeting, and see where things stood, he said.

 

But as it turned out, the market problems proved short-lived, recession fears abated quickly, so the factors facing Fed decision making changed, which in turn supported an end of bond-buying in October, as expected, Mr. Bullard said.

Then agan, this being Bullard, it is, sadly, all bullshit:

“I’m one that wants the committee to be nimble and be able to react to data that’s coming in. So maybe it’s more natural for me to say we can shade our position one way or another in response to macroeconomic developments” as they happen, Mr. Bullard said.

Sorry, James, have lost all credibility, but thanks to you all those others who have been correctly claiming that it is only the Fed that impacts asset prices were once and for all vindicated.

However, it appears that the FOMC comments have finally overriden Bullard, who will have zero leeway to comment the next time the market “plummets” by 9%. As a reminder, this is what the Fed explained about the next time there is a surge in volatility:

… members considered the advantages and disadvantages of adding language to the statement to acknowledge recent developments in financial markets. On the one hand, including a reference would show that the Committee was monitoring financial developments while also providing an opportunity to note that financial conditions remained highly supportive of growth. On the other hand, including a reference risked the possibility of suggesting greater concern on the part of the Committee than was actually the case, perhaps leading to the misimpression that monetary policy was likely to respond to increases in volatility. In the end, the Committee decided not to include such a reference.

Translation: Bullard had not been given the green light to comment and lead to the market surge which wiped out all mid-October losses.  And now the Fed has explicitly warned that the next time the market swoons, nobody will be stepping in with casual, if snyde, QE X commentary.

Then again, we will believe it once we see it.

via Zero Hedge http://ift.tt/1uk8wW0 Tyler Durden