JustDario (@DarioCpx) “I just had an interesting conversation with a friend working for a (so far) succ” — TopicDigg

I just had an interesting conversation with a friend working for a (so far) successful systematic trading hedge fund. ⚠️Her concern? All their strategies are based on backtests using even 10 years of granular data in some cases, when they are fully aware that those data represent a reality shifting away from the current one. However, the fund has no flexibility to change strategy because that would be a breach of the fundraising they did with their LPs. Not only have these constraints and wrong approach already led several pods within the HF to be shut in March after hitting the max drawdowns they were allowed to take on their AUM, but those that haven't blown up are forced to remain heavily long SP500 delta and short volatility. The only option they have to derisk is to shrink the AUM deployed, but if a pod remains underinvested for too long, it will ultimately be shut down as well. I asked why they are so heavily long SP500 delta? Her blunt answer: because the index always went up so much most of the time for so many years, without significant exposure to the index, the backtests don't yield significant investment returns. The situation is very similar across the whole HF industry, which is why most funds experienced sharp losses in March. Her last remark was how they can see how the whole market is effectively investing passively, even when not being an ETF it isn't supposed to be the case, with no room for discretion and active risk management. As a consequence, she and her colleagues can only hope that volatility remains under control without much they can do to protect their clients' money, which is ultimately a paradox.