My View on Market and Economy : Debarghya Mukherjee
- Thread starter Debarghya Mukherjee
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- Tags currecny trading economic analysis fundamental analysis stock trading
What is ROBOT TRADING?
At approximately 2:45 p.m. on May 6, 2010, the Dow Jones Industrial Average plummeted 998.50 points, but within minutes, righted itself back to pre-crash levels. For that short period of time, the market dropped between 710 percent, accounting for nearly $1 trillion in lost value. Among the possible culprits of the so-called Flash Crash was high-frequency, or algorithmic, trading (HFT)computerized trading that attempts to take advantage of short-term opportunities, anywhere from a few microseconds to a couple of minutes.Stuart Finance Lecturer Ben Van Vliet (M.S. FMT 99), who teaches a capstone course in which students build automated trading systems, is an automated trading expert who is regularly contacted by Forbes, Bloomberg, and other media outlets for his insights on automated trading as well as his thoughts on the future of markets and technology.
What was the big deal about the
May 6 drop?
The Flash Crash should be recognized not for the crash but rather for the speed with which the market rebounded. As far as we can tell, one or more large institutions came into the market attempting to sell hundreds of billions of dollars in assets. Given the already jittery market, people panicked and ran for the hills. I believe automated systems looked at the situation more rationally and saw it for what it was: the single greatest buying opportunity of the last decade and a good way to make money.
What advantage does a cool and rational machine offer the market?
People have long understood that human emotions are part of the problem of trading. Its our humanness that prevents us from thinking clearly and making rational decisions; we get scared or greedy. The revolution thats happening in markets today is not just a revolution in technology. Its a revolution in society, in that weve come to the point where more and more trading is being driven not by humans, who are bound by fear and greed, but rather by a much more rational scientific process.
Articles in the popular press depict algorithms that run automated systems as creatures that hunt, stalk, and
prowl.
Are HFT algorithms todays Andromeda Strain?
An algorithm, by definition, is just a set of steps. In financial markets, when certain opportunities arise or states exist, a computer algorithm can execute a set of steps to capture an opportunity. Of course, the algorithm can be programmed to modify its own parameters, but it doesnt have the ability to morph itself beyond what a person can program it to do. A term that is sometimes used to describe these algorithms is autopilot. The analogy is a good one. An autopilot can fly the plane; in fact, the only thing the pilot has to do is to tell the plane to take off. In flying an airplanejust like in tradingId say that more often than not, human error is the cause of the crash. Software bugs in the autopilot rarely cause crashes.
What is the future of automated trading?
Most of the research Ive done and the books Ive written revolve around the development of automated trading quality-engineering standards. I believe the next evolution in the financial industry is financial engineering. IIT is uniquely positioned to lead the industry toward strategic competitiveness by building automated systems that dont crash and have wide benefits to both society and the markets.
Please Keep politics aside form FDI for our own good
While the politics behind the contentious Cabinet decision to allow FDI in multi-brand retail and then to subsequently put it on hold, succumbing to pressure from allies, is being debated ad nauseam, the policy does warrant a comprehensive, ideologically-detached discussion. With the issue being debated in the context of the current political milieu, failure to effectively judge the policy on its own merit places in jeopardy the reforms India so desperately needs. Each of the proposed benefits and the negative implications of such a move need to be thoroughly probed in order to reach a wellbalanced conclusion. One of the main arguments in favour of the decision to allow FDI in multi-brand retail is the acute and urgent need for the country to develop efficient supply chains. The urgency is advocated on account of the need to minimise losses arising out of inadequate storage facilities, ineffective equipment and the lack of an effective backend network. By reducing wastage that is huge, increasing the supply of food grains, which is a key component of inflation, by reducing the farm-to-fork price differential, FDI in retail is touted as the panacea for all ills. It is expected that FDI will also help build the necessary distribution infrastructure and bring in better technology.
While there is no denying that the country needs a widespread and efficient supply chain, it is highly improbable that a few retail giants can enable the desired outcome.
The sheer size of the country and the Byzantine networks that companies have to navigate, render a low probability on the quick fructification of the current policy. Even big domestic retailers, backed by big cashrich Indian corporates, have failed to make a sufficient dent in the past years.
The share of organised retail to total retail trade in India is hardly 5% against 66% in Japan, 30% in Indonesia and 20% in China. It is high time for India to allow FDI in all possible categories to bring more competition in the market and reduce the gap between farm prices and retail prices.
On the issue of prices, it is quite possible that benefits that will accrue from removing the middlemen will be shared by farmers, consumers and the retailers. Farmers will benefit in the form of higher prices for their produce, while consumers will benefit in the form of lower prices. But this and other anticipated benefits may not materialise without changes in other laws, especially the Agricultural Produce Marketing Committee Act. But assuming that it plays out on expected lines, what will be the impact on inflation?
As food grains form a large component of the inflation index, many see this policy move as helpful in the context of controlling runaway inflation that India has experienced over the past few years. By reducing wastage, increasing supply and lowering prices, many argue inflation will be brought under control.
Source: ET
VALUE INVESTING LOST VALUE?
Somebody told me that "Debarghya, you are not the second richest person in this earth. You can not make comments on Buffets style." He replied me 4 months ago. Because I said "Days has changed. Buffet system is not suitable in this market situation. As we all knows that "Nobody believes you till your hairs are not white and your father and his father is not in this business blah blah blah". Now look at the story of our own Mr. Rakesh Jhunjhunwala
Ace investor Rakesh Jhunjhunwala, who has often been referred to as India’s Warren Buffett, seems to be distancing himself a bit from his mentor’s investment philosophy.
At a recent discussion organised by Motilal Oswal Securities, Jhunjhunwala partially debunked Buffett’s very long-term approach to investing, where he almost holds stocks for life.
“Every stock in life doesn’t have to be bought for 40 years. All of us cannot be Mr Warren Buffett in life, let me tell you. Just because he thinks that every stock should be bought for life does not mean that we should also buy every stock for life,” Jhunjhunwala said. The edited transcript of the discussion can be found at DNA newspaper’s website (See here).
At the time time of Buffets our market structure was not as complex as it is now. Many bulls and bears are here. More and more information are avialble to us ( even though we all have doubt on RATE and Index available to us). How same way market can move?
Jhunjhunwala, who has taken serious hits to his portfolio in the current market scenario, is clearly revising his investing approach.
I think he was bear at time of "Harsh Meheta"
Of course, there can be serious doubt as to whether even Warren Buffett adheres to his past style of investing. As Firstpost noted last month, Buffett has broken some of his own taboos, including avoiding technology shares and debunking share buybacks. This year, he bought IBM shares and Berkshire Hathaway announced a plan to buy back its own shares.
At the investment jaw-jaw session, where investment gurus Raamdeo Agrawal of Motilal Oswal, Madhusudan Kela and Ramesh Damani engaged Jhunjhunwala, the latter gave a new spin to Buffett’s idea of value-investing: “Value investing is also buying a stock, keeping it for 12-18 months and selling it at a handsome rate. Value investing is buying value where it may not (always) be lasting value. That value could be encashed over two or three years.”
One is not sure if Raamdeo Agrawal, another Buffett fan, agreed with Jhunjhunwala’s revisionist ideas on value investing, but he seemed to like the idea of blue-chip investing. Said Agrawal about his investing strategy in this beaten-down market: “I am aligning (myself) more to buy more blue-chips or emerging blue-chips. I look at individual companies rather than sectors and look at their performance. I don’t buy 10-15 companies in a year. If I can add one or two companies in a year, that’s good enough.”
Kela seemed more gung-ho about mid-cap stocks, which have simply been thrashed out of shape in the current bear market. Kela also thinks the real value of the NSE Nifty index is far lower than its current level because only “15-25 companies…are making this index.” His preference is for mid-cap stocks, which will deliver huge returns over the long-term.
As for the impact of the rupee, Jhunjhunwala, who once saw himself as a rupee bull, is now unsure. He thinks there is a 75 percent chance that the “rupee will lose more against the dollar” – a prediction that has already come true, as the rupee fell below Rs 53 on Tuesday.
Will the cheaper rupee bring in more dollar flows from foreign investors? Raamdeo Agrawal does not think so, because investors are still sitting on huge losses in India. “I don’t think it works. In fact, the guys who are there (in India) are going through their own pain after losing 35-40 percent of the year’s opening balance (due to the rupee fall). So, first that pain has to be handled.”
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How Hedge Funds started: Brief History of Hedge Funds
Hedging risk has been an integral part of the financial markets for many years. In the 1800s, commodity producers and merchants began using forward contracts for protection against unfavorable price changes. This system is still very active today.
The term "hedge fund" dates back to only 1949. In 1949, almost all investment strategies took only long positions. A reporter for Fortune magazine, named Alfred Winslow Jones, published an article pointing out that investors could achieve higher returns if hedging were implemented into an investment strategy. This was the beginning of the Jones model of investing.
To prove his hypothesis, Jones launched an investment partnership incorporating two investment tools into his strategy: short selling and leverage. The purpose of these two strategies was to limit risk and enhance returns simultaneously.
In addition, Jones established two important characteristics that are still part of the industry today. He used an incentive fee of 20% of profits and he kept most of his own personal money in the fund. This ensured that his personal goals and the goals of his investors were in alignment.
Exceptional results were obtained through this hedged approach. During the period from 1962 to 1966, Jones outperformed the top mutual fund by more than 85%, net of fees. The success of Jones stimulated the interest of high net worth individuals in hedge funds.
Not only did Jones attract the interest of high net worth individuals to hedge funds, but also many top money managers were drawn to hedge fund because of the unique fee structure. A 20% incentive fee made it possible for managers to earn 10 to 20 times as much in compensation when compared to long-only money management services.
Between 1966 and 1968, nearly 140 new hedge funds were launched as a consequence of the new dynamics of investing and managing money. Many of these funds, however, did not follow the Jones model of hedging risk. Instead of hedging, only leverage was used to enhance returns, ignoring the short-selling aspect that Jones employed. Using a leveraged, long-only strategy made these funds highly susceptible to the market downturn that began in late 1968. Some hedge funds dropped in value by more than 70% within two years.
Large hedge fund losses due to the 1973-1974 bear market caused many investors to turn away from hedge funds. For the next ten years, few managers could attract the necessary capital to launch new partnerships. By 1984, there were only 68 funds in existence.
In the late 1980s, a small group of extremely talented hedge fund managers, including George Soros, Michael Steinhart, and Julian Robertson, gave hedge funds a restored credibility. Despite difficult market conditions, these managers produced annual returns of greater than 50%.
Many of the worlds best money managers left the traditional institutional and retail investment firms because of potentially higher fees and great flexibility with managing hedge fund products. By 1990, there were over 500 hedge funds worldwide with assets of about $38 billion.
Hedge funds now represent one of the largest segments of the investment management industry. Currently, it is estimated that there are over 6,000 hedge funds in existence with total money under management in excess of $1 trillion.
How Hedge Funds works : Hedge funds strategies
Types of Hedge Fund StrategiesBelow is a list of some major hedge fund strategies:
Convertible Arbitrage
Distressed Securities
Emerging Markets
Market Neutral
Market Timing
Futures
Equity Hedge Long/Short
Event Driven
Global Macro
Fund of Funds
Convertible Arbitrage
This strategy seeks to profit from the pricing of the embedded option in a convertible bond. Often used is a long, convertible position with a corresponding short position in the underlying stock. Varying degrees of leveraged are employed with this strategy.
Distressed Securities
This strategy invests in illiquid debt and/or equity of firms in or near bankruptcy in order to profit from a potential recovery. Generally, no leverage is used.
Emerging Markets
Investment in securities by businesses and/or countries with developing economies is used in this strategy. Some emerging market countries include Brazil, China, India, and Russia. The major emerging market areas are Latin America, Eastern Europe, Asia, and the Pacific Rim. Various asset classes with different strategies are used.
Market Neutral
Market neutral strategies used are primarily arbitrage or hedging. Both strategies aim at returns with low or no correlation to stocks.
Arbitrage may be divided into merger arbitrage, relative value arbitrage, convertible arbitrage, fixed income arbitrage, and capital structure arbitrage. Arbitrage strategies attempt to take advantage of price discrepancies between paired securities.
Hedging involves investing in securities, both long and short, with the goal of low net market exposure. Long positions that are undervalued and short positions that are overvalued are selected. In theory, this mitigates market volatility.
Market Timing
Market timing strategies switch among various asset classes to time price movements in different markets. Stocks, bonds, mutual funds, and money market funds are some of the asset classes used.
Futures
Futures are financial contracts for buying or selling a financial or physical commodity (e.g., currencies, stock indexes, heating oil) at a future date. Long and short futures contracts can act to hedge aspects of many fund portfolios. High levels of leverage are often involved in futures.
Equity
Hedge Long/Short Long and short equity securities positions are taken in this strategy. The overall portfolio may have either a long or a short bias. Equity hedge long/short relies on superior stock selection. Typically, a low degree of leverage is used. This strategy is one of the most popular in terms of the number of hedge funds and amount of money under management.
Event Driven
This strategy aims to profit from price imbalances resulting from a specific event or transaction - for example, merger, hostile takeover, or leveraged buyout.
Global Macro
An opportunistic, "top-down" approach is implemented by managers using this macroeconomic strategy. Trades are based upon major changes in the global economy, including interest rates and currencies, as well as changes in the economic policies of specific countries. Macro strategies use moderate amounts of leverage.
Fund of Funds
The fund invests in other hedge funds rather than directly in stocks, bonds, or other securities. Hedge funds utilized may be of similar strategies, such as equity hedge long/short; or the hedge funds employed may have different strategies. Generally, funds of funds are less volatile than single manager funds.
TIME TO GO ABROAD : INDIAN BUSINESSMEN
The government may have saved its political skin by putting FDI in retail on hold, but it has added to the sense of gloom that's engulfing India Inc. For the past several weeks, there's been a depressing drum beat of stories of Indian businessmen choosing the relatively low growth, high-stability option of investing abroad over the uncertainty of launching new ventures at home. Says the India head of a fabled global investment bank, "For me, there's no slowdown. My plate's full with mandates from Indian companies looking at acquisitions abroad."
But it's not just about the flight of investments anymore. Several Indian billionaires say they are frustrated enough to want to shift base overseas and run their increasingly transnational business empires from cities like London and Singapore. "I'm sick and tired of what's happening here. I don't want to live in this country anymore," said one of India's biggest barons.
The reasons are mainly two-fold: the policy paralysis brought on by a politically weak and scam-struck government, compounded by obstructionist competitive politics; and the climate of fear that has spread because of the raids on and arrests of businessmen. They have a third, more specific grouse (not that it's new): the time and hassle it takes to get environmental clearance and acquire land.
Bulge-bracket businessmen - from telecom and textiles to aviation and steel to real estate and minerals - are talking 'Quit India', but obviously not in public. We are looking for red carpet, not for red tape: Harsh Goenka
They may be exaggerating, but for the first time since the dawn of liberalization 20 years ago, the India story seems to be dimming compared to the welcoming lights of foreign shores. As RPG Enterprises chairman Harsh Goenka quips, "We are looking for the red carpet, not for red tape."
The foreign lure is emerging on three fronts:
Indians buying personal assets overseas
A significant jump in outward remittances
Company owners focusing on generating more offshore currency through larger global investments in a bid to hedge themselves against India.
The latest industrial production and GDP figures are cautionary indicators against India complacently comparing itself with the dismal economic situation in the US and the Eurozone. According to a just-released survey by industry body CII, CEOs are anything but bullish about their 2012 investment plans.
Homing In On London
In the past year, many high-profile Indians have bought homes in London's toniest neighborhoods. Bharti's Sunil Mittal, who purchased a home in Grosvenor Square a few months ago, is spending more time working out of there to keep up with the firm's global needs. The Munjals are said to have bought two homes in Kensington.
DLF's K PSingh, Essar's Ravi Ruia and Sahara's Subrata Roy often live and work out of the city that once ruled India. Real estate circles in London often refer to the Berkeley and Grosvenor Square areas as upmarket 'Indian ghettos'.
Says a former top banker based in London, "Cities like London and Singapore are safe havens and the rule of law is clear. There is a sense of individual security and privacy."
Ajay Piramal of Piramal Lifesciences has also bought himself a sprawling home in London, although he isn't shifting base. He points to India's problems: "You don't know what regulation is going to hit. Sometimes it is not even rational. Very old cases are being pulled out. This doesn't give you a sense of certainty."
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