Blockhouse Archives

AQR co-founder Cliff Asness (@CliffordAsness) on a fundraising quip he now calls "staggeringly wrong": "Here's where I was a complete idiot. In going around to raise money in the first six months, I must have had 20 clients say, 'We don't need 22% vol uncorrelated to the market. How about you do a quarter of that?'" "I responded... with a flip tone, 'You want a quarter of the vol? Give us a quarter of the money.'" "I still refuse to admit I was wrong about the math, 'cause I was not. But I was staggeringly wrong because it turns out, Corey, this'll shock you, that down two standard deviations at 20% upsets people more than down two standard deviations at 5%." "Having served on many an investment committee since then, we do not call in the largest standard deviation event. We call in the idiots who are down 35%."

Former Enron gas trader and Centaurus founder John Arnold (@johnarnold), on building "the best seat in the industry" after Enron: "I felt I was among the best. I had also managed to create probably the best seat in the industry." "...my first job out of college was at Enron. I started there when I was 21 years old in 1995... it went bankrupt in late 2001..." "...deciding to start my own hedge fund." "...the classic hedge fund two and 20 structure..." "...intermediary between me and the 20%, right? I was getting the 20%." "...we had very good financial returns early on." "Whenever we had a down month or a down time period, which we had, they weren't calling to redeem, but they would call up and say, 'Do you need more capital?'"

Campbell & Company CEO Kevin Cole on why there's no holy grail model in quant investing: "We don't believe there's any holy grail, or any single model that's going to be the answer in markets." "Markets are not perfectly efficient. But I do like the phrase efficiently inefficient, and that means to me that small edges can be found through hard research, but those edges do get competed away over time. And what was once alpha becomes widely known, it gets commoditized, it becomes beta." "The central risk we face as quants is overfitting, that it's pretty easy to find a good backtest, but just because you find artifacts in past data doesn't mean they're gonna hold going forward." "'Just because you uncover dinosaur bones in an archaeological dig, it doesn't mean that dinosaurs still roam the earth.'"

IDW Group founder and hedge fund headhunter Ilana Weinstein on why remote work made poaching hedge fund talent easier, with a jab from Point72's Steve Cohen (@StevenACohen2): "I will tell you, and maybe I shouldn't say this, but I'll say it, in some ways, my job has become a lot easier in the last couple years." Steve Cohen: "But you're charging the same amount." "They're working from home. They can more clearly see what their value add is versus other people who are maybe just benefiting from being in the room with other smart people." "This year, we have had, which I've never had before, people that we've gone after for years calling us, telling us they're ready to leave."

Balyasny Asset Management founder Dmitry Balyasny on the risk limits every BAM portfolio manager trades inside: "We allocate capital in the form of volatility dollars, and then somebody has an expected Sharpe, and they multiply that Sharpe times the vol dollars to arrive at their expected P&L for the year." "You have a drawdown framework that's very objective and clear that everybody signs off on day one, and that's multi-step, so you're not forced to reduce the portfolio by a large chunk at any one time." "In equity portfolios, you'll have idio versus factor risk limits. And you might say, 'Okay, your idio limit is we want you to run at least an 80% idio, 20% factor portfolio.'" "You have liquidity limits. You have guidelines on things like number of positions and concentration. So lots of things like that, that create a box within which that person can operate."

D1 Capital founder Dan Sundheim on owning Priceline when it was growing 40% a year at nine times earnings: "Booking.com, okay? Which was called Priceline back when I owned it. It was growing 40% a year and traded nine times earnings." "Yes, it didn't make a lot of sense. But like the narrative back then was like, okay, they're just like arbing Google, and like this is like a flimsy business model, whatever." "It's a lot slower than it used to be, and it trades at like 3X the multiple, right?"

Renaissance Technologies CEO Peter Brown on why RenTech pays everyone from the same pot: "Now, as for our secret sauce, of course, there's nothing I'd rather do than disclose in great detail all the intellectual property that we've spent decades and billions of dollars creating." "The company was founded by scientists. It's owned by scientists. It's run by scientists. We employ scientists. Guess what? We take a scientific approach to investing and treat the entire problem as a giant problem in mathematics." "We encourage people to work in teams. We constantly change those teams up so that people get to know others within the firm." "We pay everyone from the same pot instead of paying different groups in accordance with how much money they've made for us, and so forth."

Balyasny's Global Head of Quantitative Research Giuseppe Paleologo (@__paleologo), formerly of Citadel, Millennium and HRT, on how the three firms actually differ: "I'll actually quote a co-head of one of these firms, without mentioning his name, who once told me, 'Citadel is Singapore. It's centrally managed, it's very efficiently managed. Everything is clean and working.'" "'Millennium is the United States because it's federated. If you want, you could say it's siloed, it's messy, it's big, but things work out in both models.'" "I would add that HRT is a little bit like Wakanda. So HRT is smaller, in a sense it's cooler. The human capital, the quality of people, I think is probably the highest among the firms that I've worked at."

Citadel CEO Ken Griffin on the college put trade that made him study the market maker's edge: "in my college dorm as a freshman, I bought two put contracts in Home Shopping Network, and in some sense I owe my career to good journalism." "fortunately from the perspective of my career, the stock cratered shortly thereafter." "When I sold those put contracts, the market maker paid me less than their intrinsic value, and that made me very curious about the pricing of derivatives, because I realized that I got very lucky in buying those puts with an expiration that fell after the stock had cratered, but the market maker made a risk-free profit." "I was very interested in trying to learn about the pricing of derivatives, and that took me to understanding the pricing of convertible bonds, which is the area that I started in from my college dorm room when I, I began my first hedge fund."

PWL Capital (@PWLCapital) CIO Ben Felix on how a leveraged ETF went to zero after a market drop triggered its swap contract's termination: "a lot of the leveraged ETFs are getting their leverage from swap contracts." "But now you've got counterparty risk." "you've got the risk of the counterparty closing the contract after an extreme downward move in the asset, which has happened." "The, the swap contract had a provision for the contract closing if there was a certain downward move in a day. That happened, and then the ETF became worthless."