From QuantLabs.net: “Scanning US markets for hot sectors to pair trade or arbitrage “

I recommend followers of Insight Corporation to check this Blog and this post in particular. Why?  It is about the list of Videos and the supporting material found in there to help the interested get a grip on Algorithmitic Trading:

Scanning US markets for hot sectors to pair trade or arbitrage

Here are my first set of call with this potential Pair Trading/Arbitrage strategy. This will be part of my Algo Trading Course in Python which you can find here

These are my ‘market calls’ as explained in my video. Just remember my disclaimer that I am not a register financial advisor and these are only for research purposes!

I will check back in a few weeks to see how these did

First call Mar 7:

 

REIT-Residential

 

Long EQR Short OAKS

 

Mortgage Invesment

 

Long LEN Short BZH

Mortgage Investment

Long HTGC Short JGW

 

And here it is Bryan Downing – the founder – talk about the issue in the post: the strategy of pair of stocks trading: ” Scanning US markets for hot sectors to pair trade:



 

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More attention to be paid to Quantlabs.net in Insight Corporation

I would like to say that I must pay more attention to a fellow Blogger here at Insight Corporation. His name is Bryan Downing and he is from England, but lives in Toronto, Canada. He is a Software geek and expert with a knowledge base in Trading and Financial Markets.

Without a regular schedule I will post and re-post editions of Bryan’s Blog: Quantlabs.net. Specially on these topics: Quantitative Investment Strategies, Markets Infrastructure, Trading Algorithms and Risk Management technologies, which are ones where I see to be of mine and Bryan’s interest and expertise. I recommend also everyone to follow and check the Youtube video channel for the Blog.

Today’s post:

Smart beta crucial to measure trading risk

Smart beta crucial to measure trading risk

This is an import risk metric I use to assess when choosing a long vs short in my upcoming Abritrage Phase of upcoming trading course. See video below to see detail of this next phase which should start early May

 

risk

 

The fork in the Hedge Fund industry

Today I return here to Insight Corporation posts. This time with a nice, informative and helpful article in Financial Times about what is going on in the so often mysterious or misunderstood Hedge Fund industry.

To wit here they are some of the best  pasts from the article:

M&A arbitrage is a good example of a highly specialised hedge fund strategy that the “quants” now say they can mimic. “Arbs” place bets on whether corporate acquisitions will fail or succeed. When a company makes an offer for a rival, it will typically offer a premium price — but there is always a danger that the deal collapses, so the shares typically trade slightly below the offer price.

Skilled arb funds — typically stuffed with corporate lawyers, antitrust experts and former investment bankers — buy the shares of targets when they think the deal will go through, and short the ones where they think the deal will fizzle. The risk is in practice binary, and the better the fund, the more accurate its predictions.

Enough deals go through that even average M&A arbitrageurs should make money over time, as they capture what Mr Romahi calls the “deal failure risk premium”.

But quants now think they can do even better than simply systematically buying acquisition targets, by studying history for what deals go through and which fail, and automatically weighing their bets accordingly.

 

And the bifurcation in the industry appears to happen on different approaches and strategies. Some with the quant computer driven models and others just involving Human Intuition and business acumen. But is there really a battle of paradigms, or a diversity of ecosystems not mutually exclusive?:

But he has identified a multitude of factors that affect the M&A strategy’s success rate, using the same statistical techniques that doctors use to determine how long a cancer patient has to live.

As is often the case with quants, they are confident that their mathematical approach produces better results than human intuition. The traditional M&A arbitrageurs are “good but often not very accurate. Our model has actually proven more accurate than the arbitrage funds”, Mr Luo says.

M&A arbitrage is just one of many popular hedge fund strategies whose secrets quants say they are now deciphering. Others include global macro — betting on the ebb and flow of international interest rates and currencies — and even activist strategies pursued by the likes of Dan Loeb’s Third Point, Bill Ackman’s Pershing Square and Carl Icahn.

I will honestly bet that a somewhat healthy co-existence of all the strategies to be in the interests of everyone. An in academia sometimes the theoretical view isn’t so that far off reality:

While the quants have crunched their numbers through supercomputers their models for what works are based virtually entirely on “backtesting” against historical data. The financial crisis showed how a slavish adherence to modelling can spectacularly blow up in real-life markets, either immediately or eventually.

“I have very little regard for these hedge fund replicators,” says Robert Frey, chief investment officer at FQS, a fund-of-hedge funds and a quantitative finance professor at Stony Brook University. “They all fail miserably when the market regime shifts.”

 

I wish you all good trades and strategies: be they quantitative or intuitive!

” #Hedge #fund managers are arguably the celebrity chefs of the money management industry. They are best able to whip up…

Posted by Insight Corporation on Friday, February 19, 2016

Featured Image: BusinessWeek Slams “The Hedge Fund Myth”

 

Quant at Risk – Risk Management with Pawel Lachowicz

A post today about Pawel Lachowicz and his Website Quant at Risk. The important topic of Risk Management now and then here at the Digital Edge.

covv

This is a picture of Pawel’s book: Applied Portfolio Optimization with Risk Management using MATLAB.

Repost – Exchange Traded Derivatives in an Automated World

A repost from the Blog The Bull Run. Worth the read, especially this paragraph:

The potential benefits of outsourcing middle and back-office functions to assist in the ETD trading process have been well documented over the years. However, the financial crisis and changing regulations that are still being discussed have forced financial services firms to reassess their operations and outsourcing plans. It is no longer just about cost savings and flexibility, but also about complying with regulations and improving competitive positions in difficult business conditions. Those that adopt new, more sophisticated and automated solutions can differentiate their offering from their competitors.”

Exchange Traded Derivatives in an Automated World.

via Exchange Traded Derivatives in an Automated World.

Securities Lending with Global Custodians

Global Custodian’s Janet Du Chenne discusses the state of securities lending with Stephen Kieley, Head of Securities Lending Sales & Business Development, BNY Mellon; Habib Motani, Partner, Clifford Chance; and Roelof van der Struik, Investment Manager, PGGM.

Pharmaceutical Saga

Consider today the Pfizer/AstraZeneca saga. To anyone minimally informed on the topic it is, to say the least, a kind of nerve-racking and stress test (with asset quality guaranteed…) state of affairs!

The issue became a matter of political dispute, which isn’t a good predicament for good business practice. And then there is a scientific perspective also, that adds further to the smog.

A conflict of interest is inevitable in this deal: it is a pure big Tax arbitrage opportunistic one but on the other hand the British shareholders and wider taxpayers want to protect their interests, both financially and politically with the advantage that accrues to all Society of having good Research&Development projects being done on the UK jurisdiction.

FT’s James Mackintosh, writing in Alphaville, bluntly states (emphasis mine) what at first glance seems obvious:

” Both sides are wrong, for the right reasons. They are wrong because both sides have forgotten what capital markets are for.

To understand this one needs to understand the strange nature of the Pfizer deal. It is happening purely because of the dysfunctional interaction of the UK and US tax regimes.

The US has a deeply unattractive corporate tax regime, with a headline rate the highest in the developed world at 35 per cent – albeit riddled with loopholes for special interests – and levies tax on foreign profits only when they are repatriated. For a multinational able to move to a lower-tax country such as Britain (or even Ireland), it seems an obvious way to boost profits for shareholders.

But the US will only allow Pfizer to shift its tax domicile to Britain (easily, at least) via a takeover involving existing shareholders owning less than 80 per cent of the new company.

The deal only makes sense with the benefit of the UK tax regime. Pfizer’s tax bill will be reduced directly, it will be able to use the even-lower tax UK “patent box” system, and cash it builds up outside the US can be brought back to HQ without tax.

Go back to why markets matter. Markets don’t have some magical quality which makes them innately good (or, indeed, evil). Markets are simply the best way found so far to balance supply and demand, allocating capital to new projects in a way far better for the economy than the opposite extreme, the communist five-year plan.

Markets are not perfect. Even an entirely free market will swing between excessive optimism and excessive pessimism about new ideas – as in the dotcom bubble. There may be cases where governments can intervene to damp such excess, although I remain doubtful about how to keep politics out.”

It seems that there are some loopholes in the above argument about the US tax system. But the main point is about the question of Market forces, shareholders & management incentives and efficiency. The normal rule of good investment practice, that precludes excessive Government interventions and regulation, might in cases as this be balanced with a proper and rigorous account of the right wider Society welfare. Which is far from easy. Is it always true that maximizing efficiency and shareholder value will inevitably turn in greater welfare…

Further down, again Mr. Mackintosh:

M&A should as a matter of course be left to the market. Shareholders should be allowed to be “short-sighted”, as the FT leader put it, if they so wish. They will lose out, and competitors with a different view can pick up the profits being ignored by those shareholders. Governments which try to stop the suffering will end up protecting those industries which shout the loudest.

But when M&A only happens because of governments, governments are right to stop it.

This is one of those cases: the US and to a lesser extent the UK have distorted the system. The immediate losers will be workers and scientists at both Pfizer and AstraZeneca, along with US taxpayers. But in the long run we all suffer, as the market is allocating capital inefficiently, and that means slower economic growth than would otherwise be possible.

As matters unfold the deal came to a standstill, the final offer by Pfizer of £55 per share was denied, which valued AstraZeneca at £69.4 bn. And there is a game of blame each other for the possible failure. The deadline is approaching. Let’s hope for the best:

‘Under UK takeover rules, Pfizer is not allowed to increase its offer or launch a hostile bid because it declared its £55 proposal final and said it would proceed only if the bid was recommended by AstraZeneca’s board. However, in its statement late on Monday, Pfizer “reserved the right subsequently to increase its offer at any time”.

Some shareholders took this to mean that the two companies could agree a recommended £55-per-share deal as a first step towards a higher price. The May 26 deadline could be extended at AstraZeneca’s request, if it agreed to resume negotiations.

People close to AstraZeneca say the UK company saw Pfizer’s statement as an attempt to sow confusion and foment rebellion against its board.

AstraZeneca issued its own statement, saying: “Pfizer’s final proposal, which the board rejected, is not capable under the Takeover Panel rules of being increased or even suggested at being increased, privately or publicly.”

Indeed, let’s hope for the best outcome possible.