Which HF Strategies do your think are likely to make money for the rest of the year? There are some encouraging signs in convertible space. What is your view? Thanks.

The most profitable HF strategy has always been to:1.) Raise as much investor capital as possible2.) Invest the capital in a strategy whose recent historical volatility is low, and is more correlated to the market than it looks, but is likely to become very volatile soon3.) Charge fees of 3% of assets and 30% of profits

not at all convinced with the convert space. I think macro and cta will do well for the rest of the year

If you are willing to put up with relatively higher vol, I would say CTAs.

What about emerging markets and getting exposure to commodities through them? When would you expect a spike in volatility in emerging markets?

QuoteOriginally posted by: exotiqThe most profitable HF strategy has always been to:1.) Raise as much investor capital as possible2.) Invest the capital in a strategy whose recent historical volatility is low, and is more correlated to the market than it looks, but is likely to become very volatile soon3.) Charge fees of 3% of assets and 30% of profitsYou left out the best part:4) Hire top talent, have them generate millions in profit5) Keep it all, forcing them to leave and spend the next X years of career hell having to politely explain why they walked out of a top-performing shop

QuoteOriginally posted by: PaperCutYou left out the best part:4) Hire top talent, have them generate millions in profit5) Keep it all, forcing them to leave and spend the next X years of career hell having to politely explain why they walked out of a top-performing shopRight on the money papercut!

donyoshi - i am with you - i am bearish on CB "arb" funds. the actual value, in the sense of assets being cheap by any reasonable arbirtage-type measure, is pretty much zero in the asset class.you might look at a graph of implied vol and say "gee it is low compared to historical, so it will have to go up". but even if it does, index options will probably outperform CBs on the way up as CB arb guys try to "lighten up" their positions (meaning sell them to other CB arb guys).i think being short CBs over the next 6-9 months could be profitable as redemptions in CB funds cause CB positions to be more and more highly concentrated with fewer funds, and the leverage in the system increases. any situation in which you find a group of leveraged guys on one side of a trade, and long term money on the other side, will lead to instability eventually.the CB "arb" phenomenon is definitely a bubble, with 2003 being the golden year. CB "arb" funds played the various carry games that year. all you needed was to be long the CB and short stock with no rate hedge. then you got the carry trade due to the upward sloping yield curve, the carry trade due to taking unhedged credit risk (this is arbitrage??) and as long as the markets stay reasonably volatile the vol part of the equation should be ok. i couldn't believe people didn't see what had happened that year - and a flood of money poured into the sector in 2004. amazing.

ca arb funds make up for about 10% of convert volume outstanding. this spells: no arb anymore. historically this was a buyers market with more firms trying to attract capital by selling too cheap options than buyers interested in that paper. that changed at latest by the hedge fund boost around 2000. betting on volatility can be done easier, cheaper and with more liquid instruments than by buying tiny cayman companies ...i would think that smaller credit hedge funds, which buy cash instruments and not so much engage in trnached index games, should continue to do well ... i have a cta running and would love to see it up, but i doubt anyone can really forecast fat tails seriously. maybe a crash, but i do not see too much danger this fall (uups, did i really say that?)peace

Converts used to (back in 2001) have significantly higher yields and implied vols than comparable securities (often on their own leaps or bonds). I think the CDS market finally killed that, since the arbs could separate the risk, and CDS are now liquid enough to make such arbs practicle. Pairs trading and other mean reverting strategies were easy money in the 90s (do a backtest, it's crazy), but now mainly gone. And risk arb had huge spreads through 2001, that are now much smaller. Entry, competition, lower profits.

Sadly, in a way, the strategies that are getting "arbed to death" are the most quantitative ones: cb arb used to be considered "quanty", vol trading is not that different from directional trading these days, stat arb and mean-reverting pairs are not generally as profitable as they used to be.I think this is due to a massive brain-flow into quantitative finance, coupled with a massive money-flow.I bet over the medium term the strategies that perform best will be fundamentally based rather than quanty arbitrage type strategies. In the short-term, shorting crowded strategies like CB arb should be good though...

i think it is the same as it always was: what is public know how does not pay off anymore. we came into pairs trading half a year before vola and dispersion dried out, but the experience of a sharpe of 3 was pure fun ... watching the curve to flat out was pure pain ...i do not second the "quant is dead" spirit. ten years ago the story was "quant is better than nonQuant", today it is "betterQuant is better than worseQuant". today you need to be willing to move into whatever area possible, you need to be willing to invest pioneer spirit in order to get pioneer return - as it was at any time. that means: do not stick to US, but be willing to bear inconvenience of other places. be willing to look at level II data. and so forth. not to speak of more sophisticated tools ...i remember that in 1999 i hardly knew too anything about pairs trading - i was too far away from the center of financial insight. the only thing you can do is crawl deeper ... all the time ... never ending story.peace(wish i was able to do this as easily as i can type it ...)

Efalken nice pictures! What do you all think about Pipes (Reg D) investment? Pipes seem to have come out of their murky past and especially the conservative ones (mark the warrants at zero) seem to be doing well. Thanks.

Pipes used to be a classic, whereby you buy seasoned (ie, existing) equity at 10% below last value, and all you have to do is hold it for 3 months before they tell the existing stockholder who were diluted (suckers!). This is risky because investors are generally infusing a money losing operation, which is scary. But most (all?) PIPES guys I knew would short sell these positions the day they decided to invest (which may be even before the day they gave the issuer money). All this was illegal (though they would short in different legal subs to make it not obviously so), and it seems the SEC caught up to them. So that game has now drastically changed (ie, since early-mid 2004). You have a product with a decent return but huge volatility because you are naked long crap for 3 months (and it often takes 2 months to then totally exit). I don't know how they changed the product to make it more digestable to investors, but PIPES continue. My guess is they prospectively are a 0.2 sharpe strategy, as opposed to the old 2 sharpe.