Why Algorithmic Hedge Funds Often Outperform Mutual Funds With The Best Fund Managers And Analysts
- Strategeriest
- Nov 30, 2022
- 7 min read
Dear Readers,
Please note the below is not investment advice. Please see the disclosure on the homepage. It is intended to be an academic article to be pondered and discussed by interested parties. I do not have a series 63 of 7 license.
I would also like to preface this article by acknowledging the leverage restrictions detailed in the 1940 Act are mathematically beautiful. Via hearsay, I can allege a former Head of Hedge Fund Risk at a major brokerage has mathematically proven it is impossible to bankrupt a US registered mutual fund due to this regulatory Act. I could not testify that it is mathematically impossible, as I did not personally witness his math, I only heard about it from a reliable source.
Below is a link to a more detailed synopsis of the benefits and risks of leverage in close ended mutual funds. As it was posted by Fidelity, I assume it been reviewed in accordance with regulatory standards.
I am of the opinion that the leverage restrictions detailed in the 1940 Act should be lessened for certain strategies in US domiciled mutual funds to allow for them to compete with hedge funds. Below is my reasoning for this opinion.
Fund Managers are tasked with outperforming their selected benchmark indexes while adhering to the investment mandates and cash restrictions they have imposed on themselves. This is to allow for their fund’s holders, and fund holders’ advisors to intelligently diversify their entire portfolios. They do this with the aim of maximizing their Fund’s Investors’ returns while staying within these mandates. To accomplish this, many use the portfolio variance equation detailed in the video in the below link:
They use this formula not only for optimizing total fund returns, but as a factor when selecting individual securities within asset classes. When used correctly, this formula optimizes negative covariance relationships within a portfolio. This allows fund managers to reduce their sharp ratios while hopefully beating indexes.
The formula works across entire portfolios when it is expanded. However, when it is used by hundreds of portfolios, I hypothesize it can hinder the efficient market hypothesis. I have noticed pairs being grouped within indexes and believe this equation to be part of the problem. My hypothesis is, it causes many portfolio managers to trade the same securities in the same manner. this reinforces correlations between certain securities that are not reflective of the securities intrinsic value and can distort markets.
I am also of the opinion that this strategy has left many fund managers who invest in these pairs within the same portfolio as prey for algorithmic traders. This is because it is possible for momentum algorithms and traders to optimizing position sizes between pairs of securities based on predictions of asset pairs’ price movements.
In reference to the click bait title, this is one of the advantages Hedge Funds often have over mutual funds. It is mostly due to Hedge Funds having the ability to leverage up to a higher extent than their peers adhering to the 1940 Act. With this additional leverage another advantage they have is that when they inaccurately predict how the mentioned asset pairs will move, they have leverage available to dollar cost average out of the losing positions. A risky example of how they may or may not accomplish this is below:
Risky Example: It is expected Stock A will move higher than Stock B
Beginning of Trading Day 1: Purchase 100K of Stock A and 40K of Stock B for a NAV of 140K
Result: Stock A losses 1% and Stock B gains 1% throughout the day.
NAV = 99K+40.4K = 139.4K
Beginning of Trading Day 2: Use 70K of Margin for an additional 50K of Stock A and 20K of B
Result: A gains 1% and Stock B lost 1% throughout the day; margin purchases sold EOD.
NAV =({99K+50K}*1.01+{(40.4K+20K)-[(40.4K+20K)/100]}) – 70K = 140.69K
As detailed in this example, even though the Investment Manager was incorrect about portfolio allocation on the first day, she still made a profit. She made a profit despite the example confirming that the stocks were the same price at the beginning of day one and the end of day two. In this example, the Investment Manager is able to make a profit by utilizing leverage.
Obviously, this strategy is risky and the current regulations governing mutual funds prevent it for the good reason of de risking our markets and preserving investors wealth. However, some risks can also be mitigated with proper probability math. If regulations governing leverage are lessened for mutual funds using proven probability math to allow for additional leverage, it could help fix the markets and capitalism in my opinion.
Many claim both markets and capitalism are being destroyed by investors costing high beta securities as opposed to investing in companies that invest additional capital in projects projected to return capital at a higher rate of return than their internal weighted average cost of capital. Hopefully we see intelligent people offer real solutions that can help this.
Warmest Regards,
The Strategerist,
P.S.
I may have fixed a couple of different parts of math and incorporated the fixes into an algorithm that I distributed to friends. It is possible the algorithm was distributed to an audience wider than I intended.
The day after I distributed it, I noticed it’s patterns seemingly affecting various asset classes. I am confident, it was used to devalue the Japanese Yen in comparison to the dollar prior to this year’s rate hikes. It will be tough to prove this with the Taylor rule as I hypothesize much of the Yen’s value was derived from the BOJ outtrading the world for 20ish years, and the algorithm cut into their profits. I am also confident the algorithm was responsible for putting Nadex in a position where it had to be saved by Crypto.com. This is contrary to the efficient market hypothesis.
I am urgently selling Unreformed and Broker Inc. which owns www.unreformedandbroker.com, the mentioned algorithm I wrote, and a second additional algorithm I wrote. The second algorithm when tested with the VBA random function beats roulette by an average greater than 3.5% per six spins.
I am asking 12 million for both algorithms and Unreformed and Broker Inc. I insist a Hedge Fund or Investment Manager verify the algorithms prior to a purchase to ensure no one is being ripped off.
I am urgently looking to sell these three items because I need the money for lawsuits and am concerned about a trend I have been reading about, which is people being locked up without cause.
I am concerned about this because it has happened to me, and I need funds to pursue legal recourse. I can also stick neodymium magnets to my head, and have never consented to having any metal put in my head. I need to get that checked out, without the threat of being diagnosed as a schizophrenic.
If anyone is curious about how easy it is to get locked up without cause in Massachusetts. Please keep reading. I detailed the process I completed to accomplish this feat.
The presentation includes a lawsuit, medical records, excerpts from an email disputing the comments in the medical records, and a court transcript detailing the corruption of the Massachusetts’ court system. I would not normally disclose my personal medical records, but post COVID, it seems we are losing our HIPAA rights anyway.
For me to get committed in Massachusetts’ it was essentially a four step process.
Step 1:
Have a doctor make a nurse make a mistake at an emergency room, and trust healthcare workers are good people and will not cover it up. Attached is a lawsuit regarding the initial incident that triggered the process I accomplished. I did not have the funds or time to see the lawsuit through to a conclusion.
Step 2 Call the Marshfield Police when you have a concern, and get held against your will without consent for two weeks. It was my fault during this encounter with the Marshfield police that I failed to notice they showed up with an ambulance for no reason. After the incident, I was unable to prove they did anything wrong, because they refuse to release the audio recording of the call.
Steps 3 and 4 are the next incidences I am looking for funds and legal help to remedy, as I do not have evidence to remedy Step 2.
A short summarization of steps 3 and 4 is that I got locked up for two weeks for flaring my nostrils after I was driven to the hospital to get an EKG test because I didn’t have a car in the city at the time. I was then locked up again for five and a half months because someone filed a false police report against me.
When I was arrested, I wasn’t allowed to call a lawyer prior to arraignment, speak at my arraignment, or defend myself against accusations backed by tangible evidence. I was declared incompetent. They are incompetent, and it was contempt they saw on my face.
Evidence of Step 3 are excerpts of an email explaining what actually happened during the MGH visit to the psychiatrist who freed me. Many of the notes in the medical records are complete misrepresentations of the conversations we had, as well as my medical records.
Evidence of Step 4 are the transcripts of the hearing that got me committed.
If you know someone who is looking to purchase my algorithms and company, please give me a call 617 899 2125.
Considering the circumstances, I don’t want to sound too crazy now that my Dad has passed since getting me out of lock up. So please enjoy the below music video to lighten the mood. I am optimistic that I will have a better outcome than those allegedly institutionalized for believing 9/11 covered up a tech bubble and the Afghan war was to preserve the worlds opium supply. #PerryCountyKentucky2002 JK, hopefully if I am able to raise these funds so I can afford a legal team that will have a better outcome than Todd Beamer Rollin against the hijackers on flight 93, or his hometown of Flint Michigan.
Comments