"The most curious part of the thing was, that the trees and the other things around them never changed their places at all. However fast they went, they never seemed to pass anything. 'I wonder if all the things move along with us?' Thought poor puzzled Alice."
—Lewis Carroll, Through the Looking-Glass
Although the population of quantitative hedge funds explodes in a geometric progression annually, it lacks diversity, and is in essence, homogeneous. To expound succinctly; most quantitative funds are like clones of each other in terms of; Trading Strategies, Human Resource Mixes, Risk Management Strategies, Organizational Structures and Trading Algorithms.
Usually, the uncanny similarities in the trading strategies practised by quantitative hedge funds are caused by either: widespread imitation or mimicking of the trading strategies of alpha quantitative hedge funds (usually by other less prominent quantitative trading organizations), and or; the gradual fragmentation/disintegration of large quantitative hedge funds into a plethora of organizations with identical/similar trading strategies.
To fully comprehend the latter: think in terms of Clifford Asness leaving Goldman Sachs Asset Management to establish/found AQR, OR, think of other countless Goldman Sachs Asset Management quantitative proprietary traders who left to found their own funds that (usually) replicated the trading strategies they practised at Goldman Sachs Asset Management.
Hence, this is the reason why the majority of quantitative hedge funds usually find themselves pursuing the very trading opportunities that are being pursued by their competitors. This usually results in overcrowding in trades.
Furthermore, this 'strategy-similarity' also has the concomitant effect of reducing the exploitable alpha opportunity-set (available to individual funds) in a best case scenario, or the loss of principal (by individual funds, or the majority of the participants in the overcrowded trades) in a worst case scenario.
Thus, this is the reason why quantitative hedge funds are always trying to exploit alpha-generating opportunities at ever-increasing speeds: they want to get to the trades before anyone else spots, or has the opportunity to exploit the trades.
Therefore, quantitative hedge funds are constantly upgrading their hardware systems in a bid to increase the speed with which trades are effected. However, as Rick Bookstaber observed, this is a negative sum game. If a quantitative hedge fund acquires hardware technology that expedites the manner in which transactions are executed, it will have a trading edge over its competitors.
However, this trading performance edge is only temporary, because hardware developers, usually market the technology they create to other quantitative hedge funds when they discover that it is useful in the quantitative trading arena.
Thus, when the rest of the quantitative hedge fund community knows that other similar/like funds are successfully-using the new performance-enhancing technology, more funds will acquire the technology until it becomes banal/ubiquitous. Hence, this has the effect of gradually canceling-out the trading edge that accrued to early adapters of the technology (as it gets adopted by other players who have an identical trading strategy with the early adapters).
Inevitably, trades will become over crowded again. Which simply means that the quantitative hedge funds would have invested money in performance-enhancing technologies, only to find themselves in the same relative position they were in before they acquired the said technologies. This concept is termed The Red Queen by biologists.
Hence, it doesn't make sense (for quantitative hedge funds) to invest in the acquisition of publicly/readily available trading performance-enhancing technologies, because other (similar) competing funds could easily acquire the same technologies, which would cancel-out any trading edge that can be derived from the technologies.
Thus, I strongly/firmly believe that it is far more practical for quantitative hedge funds to acquire trading performance-enhancing technologies and their associated intellectual property rights, direct from hardware development start-ups that create them.
That way, they can get unique technologies, that no other institution else has, which would give them a lasting trading edge over their competitors.
Otherwise, any technology expenditure they make, in a bid to enhance the performance of their portfolios, will be an exercise in futility.
—Lewis Carroll, Through the Looking-Glass
Although the population of quantitative hedge funds explodes in a geometric progression annually, it lacks diversity, and is in essence, homogeneous. To expound succinctly; most quantitative funds are like clones of each other in terms of; Trading Strategies, Human Resource Mixes, Risk Management Strategies, Organizational Structures and Trading Algorithms.
Usually, the uncanny similarities in the trading strategies practised by quantitative hedge funds are caused by either: widespread imitation or mimicking of the trading strategies of alpha quantitative hedge funds (usually by other less prominent quantitative trading organizations), and or; the gradual fragmentation/disintegration of large quantitative hedge funds into a plethora of organizations with identical/similar trading strategies.
To fully comprehend the latter: think in terms of Clifford Asness leaving Goldman Sachs Asset Management to establish/found AQR, OR, think of other countless Goldman Sachs Asset Management quantitative proprietary traders who left to found their own funds that (usually) replicated the trading strategies they practised at Goldman Sachs Asset Management.
Hence, this is the reason why the majority of quantitative hedge funds usually find themselves pursuing the very trading opportunities that are being pursued by their competitors. This usually results in overcrowding in trades.
Furthermore, this 'strategy-similarity' also has the concomitant effect of reducing the exploitable alpha opportunity-set (available to individual funds) in a best case scenario, or the loss of principal (by individual funds, or the majority of the participants in the overcrowded trades) in a worst case scenario.
Thus, this is the reason why quantitative hedge funds are always trying to exploit alpha-generating opportunities at ever-increasing speeds: they want to get to the trades before anyone else spots, or has the opportunity to exploit the trades.
Therefore, quantitative hedge funds are constantly upgrading their hardware systems in a bid to increase the speed with which trades are effected. However, as Rick Bookstaber observed, this is a negative sum game. If a quantitative hedge fund acquires hardware technology that expedites the manner in which transactions are executed, it will have a trading edge over its competitors.
However, this trading performance edge is only temporary, because hardware developers, usually market the technology they create to other quantitative hedge funds when they discover that it is useful in the quantitative trading arena.
Thus, when the rest of the quantitative hedge fund community knows that other similar/like funds are successfully-using the new performance-enhancing technology, more funds will acquire the technology until it becomes banal/ubiquitous. Hence, this has the effect of gradually canceling-out the trading edge that accrued to early adapters of the technology (as it gets adopted by other players who have an identical trading strategy with the early adapters).
Inevitably, trades will become over crowded again. Which simply means that the quantitative hedge funds would have invested money in performance-enhancing technologies, only to find themselves in the same relative position they were in before they acquired the said technologies. This concept is termed The Red Queen by biologists.
Hence, it doesn't make sense (for quantitative hedge funds) to invest in the acquisition of publicly/readily available trading performance-enhancing technologies, because other (similar) competing funds could easily acquire the same technologies, which would cancel-out any trading edge that can be derived from the technologies.
Thus, I strongly/firmly believe that it is far more practical for quantitative hedge funds to acquire trading performance-enhancing technologies and their associated intellectual property rights, direct from hardware development start-ups that create them.
That way, they can get unique technologies, that no other institution else has, which would give them a lasting trading edge over their competitors.
Otherwise, any technology expenditure they make, in a bid to enhance the performance of their portfolios, will be an exercise in futility.
