The map of quant strategies

 from Ruuj @RuOnchain1

The map of quant strategies provides a good starting point for discussing the available choices. You need to think about holding periods and capacity. A strategy has constraints that will limit how much can be extracted from the market. This limits the size of hedge funds, not just for the fund itself but for all funds trading the strategy. It is important to think through capacity not just for your fund but for the market as a whole. Strategies need to think about impact costs. Execution is an essential part of any quant strategy. 

Inflation still needs to be controlled

 

Inflation still needs to be controlled, with October CPI at 3.7% and CPI excluding food and energy rising to 2.6%. Energy prices have fallen since the beginning of the month, but the numbers still aren’t headed in the right direction. Still, this forces the Fed to act at its December meeting since the overall economy seems to be in good shape. The probability of a Fed hike has increased, and Fed Governor Waller now suggests a 50 bp increase may be necessary.

 

While the numbers were below consensus, inflation still suggests Fed action is necessary. 

Another new term - "speedball" capitalism

 

The Economist coined the term speedball capitalism to describe the current state of global finance and markets. It combines massive AI capital expenditures tied to rapid hype and inflated equity valuations with the market depressants of high interest rates and geopolitical instability. On the one hand, you have euphoria from the AI explosion; on the other, a gloomy market backdrop of rising costs of capital.

This is the financial equivalent of the K-shaped recovery. Some are doing well, and others are not. The world looks very different for AI people than for those trying to manage higher rates. 

The news cycle seems compressed and quickly moves from strength to weakness. Investors just move from one idea to the next, pushing capital into the next new thing. The finance world is full of contradictions, again, between strength and weakness.  All this creates large capital flows that can change on a dime.  

This connects to Adam Tooze's phrase, the "profit dollar," which suggests the dollar is associated with equity flows rather than the usual bond-safety flows. 

New word in finance - FOGO

 

FOGO - it is not Fear of Getting Old, but 

FEAR OF GETTING OBLITERATED!

Forget about FOMO - fear of missing out. That was yesterday. Now, as Paul Singer and Elliot Investment Management highlighted in a recent investor letter, the real fear should be excessive speculation and high valuations. We have heard this before, and it may be early, but downside risk is high when valuations are high. 

The fear is a quick shift in valuation thinking, and it will be hard to exit positions when the market turns. 

The key issue is learning to be a resilient investor who can diversify and adjust allocations when expectations change sharply. Scenario analysis can help here. Consider upside and downside risk, and plan for the extremes.