28 June 09
Jay Yam, 22, had the following comments after reading some of our articles.
Hi,
First of all, thank you so much for writing such a professional and informative blog for us.
Here are my questions: How useful is quantitative analysis with it comes to commodities trading? Do all the CTA heavily rely on their black-box system too or they are more discretionary in trading? What's the difference between a hedge fund and a prop firm? In the REAL world of trading, what is the set of skills that differentiate a trader from a quant analyst or hedge fund manager? The more I read, the more it seems to me that there is no need for trader anymore, all they need are just engineers, mathematician, and a super computer. Lastly, it only takes a BA in Finance to get in a prop firm, but it takes a PhD in math to become a quant, why?
From me:
Thank you for visiting Finance4Traders. I find it difficult to answer your questions because I do not know if you want to employ quant strategies for yourself, or if you want to be a 'quant trader' at a firm. I shall answer to the best of my knowledge and understanding.
1) The most common quant strategy specific to commodities, I would say, is in the trading of calendar spreads. Certain commodities go through periods of contango and backwardation due to seasonality and supply/demand imbalances. Like bonds, this implies that commodities have a forward curve. The real quant part lies in the estimation of the forward risk premium. I hope I am not talking greek.
2) I cant really comment if CTA firms are more into black boxes or discretionary trading. But I do believe that there is growing use of automated trading systems, where you define your trading rules and program them into software like NinjaTrader or TradeStation to do it for you. Professional traders use more sophisticated platforms supplied by Trading Technologies etc.
3) I define a prop firm as one where you trade the boss's money. A hedge fund trades some one else's money. I am not referring to trading arcades where you rent a desk and trade your own money next to another self-employed trader. The critical difference between a prop firm and a hedge fund lies in its risk-reward profile and the capacity of its strategies.
A hedge fund has to go out there and get clients. This means that its risk-reward profile has to be acceptable to sophisticated investors. A prop fund can take on very risky, but rewarding strategies without having to make any client lose sleep.
A hedge fund is open to outside investors and makes the bulk of its money from commissions and fees. This means that the strategy the hedge fund uses must have a sufficiently high capacity. I.e. The strategy should involve markets and trades of such sufficient liquidity that the fund itself does not become the market. For example, if your fund has 2 billion dollars and only arbitrages S&P500 futures, you would probably be losing money compared to a prop firm arbitraging S&P500 futures with only 5 million dollars.
4) In general traders are more risk taking. They put their money, or salaries in their trades. 'Quant traders' employ trading strategies that are quantitative in nature. Quant analysts don't risk much. They provide analysis and reports. Note that many quant analysts are actually risk managers, compiling risk reports and analyzing risk exposures.
5) Yes, there is some truth that traders are increasingly being replaced by automated trading systems. Even in some trading arcades, retail traders are building their own computer systems to arbitrage.
6) However, traders are still needed to pass intelligent judgments on the markets, such as where the economy is headed etc. It takes a lot more money and effort to develop a sufficiently intelligent program to make judgments based on news and non quantitative information. It depends a lot on the edge of the firm whether it is in programming, statistics or market/economic analysis
7) Strictly the implementation of quantitative strategies can be done by anyone who puts in the effort to learn the math and talks to the right people. In reality, many firms hire graduates with a bachelor's degree or a master's degree to structure and sell products/derivatives using pricing models built by quants with Phds. Traders are chosen for different reasons. In simpler markets such as spot or futures, they are generally chosen for their trading skills, which is subject to the definition of the employer. Usually, people who can think quick and are highly numerate are valued. Ultimately, your interview must feel that you are smart and are not that stubborn as to blow up as a trader subsequently. If you build your own automated strategy and is able to articulate it well at an interview, you might increase your chances of being hired. I have seen people who are hired that way. An advanced degree is not necessary.
When trading more complex instruments, such as exotic derivatives, a master's in financial engineering will be an edge. Phds are usually hired to be modellers, i.e. create programs for traders and the like to price instruments. Alternatively, they may be hired to develop strategies at hedge funds. Finally, certain Phd graduates may apply for the same jobs as other master's graduates and get hired. Therefore, whether a Phd is needed really depends on the scope of your desired job and the preference of the hiring organisation. Small firms usually do not hire too many costly Phds.
A Phd provides 2 forms of training. Firstly, it helps you to gain the basic quant know how, such as serious statistical testing and modelling techniques, such as neural networks, Markov regime switching strategies etc. Secondly, the fact that you managed to complete your thesis shows that you are able to work independently without spoon feeding. However, it does not mean that you cannot acquire these skills on your own and develop your own strategies.
[On hindsight, I really advise that you think about you would like to do and see what firms usually look out for when hiring for such positions. Finally, do consult a professional career counsellor who can better analyze your aplitudes can give you more appropriate advice.]
Let me know if I have answered your questions. I will be glad to answer them.
Best Regards
23 June 09
Helen from UK asked for a spreadsheet example on Value-at-Risk, VAR. I dug out what I could find, updated it and sent it over. Very crude version though.
Download links
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The objective of Finance4Traders is to help traders get started by bringing them unbiased research and ideas. Since late 2005, I have been developing trading strategies on a personal basis. Not all of these models are suitable for me, but other investors or traders might find them useful. After all, people have different investment/trading goals and habits. Thus, Finance4Traders becomes a convenient platform to disseminate my work...(Read more about Finance4Traders)
3 comments:
Hi,
It's Helen from UK. Thanks for sending me your spreadsheet, much appreciated.
Helen
Hello, this is the first time I visit this blog, very interesting indeed. I wanted to ask you also have an excel sheet with the graph kagi? Thank you very much.
Regards.
was your google site download converted to a new site? The current link doesn't work.
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