I’m a Wall Street quant strategist (ex Credit Suisse / Neuberger Berman). Ask me anything about investment strategy and portfolio construction!

Studies have found that as many as 80% of active money managers underperform the S&P 500. Why should I (or anyone beyond the ultra-wealthy) pay a money manager an annual percentage of my assets rather than just putting the bulk of my money in index funds which are nearly free?

You shouldn't, indeed.

The problem with this is twofold:
1) The average investor doesn't really know much about investments and finance;
2) The communication from hedge funds and investment managers is not clear, to say the least.
Recent laws are trying to improve point 2, but we, as investors, must learn more to overcome the gap number 1. Once we have the tools, we don't only make our best interest, but also improve the industry as a whole, because these funds won't get the money and they will eventually disappear.
And once they disappear, winners will be much easier to spot. But the market is inefficient in all its respects, and it will stay like that for a while, so please focus on learning and understanding the investment opportunities proposed to you. And if you find a good one after this process, it means you really understand it.

We could add a 3): investors are very greedy, and the Sharpe Ratio and drawdown of passive investments is dissatisfying. So, if one finds a (truly) good opportunity, they give it a try. However, greed leads you to make mistakes. Be always careful.

I think this is generally the case...But the problem is that the results don't acknowledge the fact that if a Portfolio Manager is running a 'balanced' fund - i.e. equities + bonds, the mandate is not to beat the S&P but to have less volatility, less swings...There are some PM's that beat on "Risk-adjusted returns" which doesn't sound as sexy but their clients don't call them up yelling "What happened yesterday?!" as often.

It happens, but we must admit that the majority of investment companies underperform their benchmark, whatever that is. I am talking also about fixed income funds vs fixed income indices/ETFs, and often those who beat them are actually selecting some ad hoc benchmark which is also easy to beat somehow.
By the way, it is a hard job, so kudos to those beating a risk adjusted benchmark as well. And it is also true that media and clients sometimes compare apples with oranges (how can a Fixed Income fund outperform the S&P500? It is not uncommon to see investors comparing the two)

Do institutions actually care about performing well? Aka beating the SP500 or are more concerned with earning $$$ for themselves?

A very large number of well educated analysts and heads of depts across various IB’s and hedge funds have regularly made wrong calls in their reports almost as if their reputation does not matter. Is it in their interest to be right or just publishing the report will do (being wrong consistently is immaterial)?

The call for a single security is always a 50/50, best case scenario. You should never trust someone who is sure about their advice...What I can say is, investments developments are often impossible to forecast with accuracy, especially when unexpected events occur. The best is to keep a portfolio exactly for this reason: I will be wrong picking up one security, but if I pick up a general direction for the future, I might be right. No technical or fundamental reason will truly hold if too specific, and no security deserves 100% of your portfolio, only indices (ETFs) might have a reason for that.

not to mention Warren Buffett is arguably offering his stock picking service for free

The true magic would be to forecast Buffett's stock picking :) by the time he discloses his holdings, it's already late (but still better than picking ourselves)

Any idea whats in the toxic swap baskets that blew up Archegos and got handed to CS, then to UBS and why UBS was so against taking them on?

Do you think that swap basket contributed heavily to their fall or were there other greater reasons?

Do people inside Credit Suisse despise Bill Hwang?

This is fairly well known already, at least within high finance circles...

Archegos was levered to the gills via total return swaps on high-beta growth stocks. Their exposure was so large and so spread out among counter-parties that no one had a real idea of the size until they started missing margin calls...

and CS still holds the counterparty short positions those swaps were made on right?

No

so swaps just disappear if "a party" goes under?

Swaps are contracts between you and I. If I go bankrupt, it is because I can't afford to pay my obligation on that contract. So yes, the swap "disappears", in the sense that I will pay what I can to my creditors and shut my business down.

I worked in CS, but Archegos was in a totally different division of the company. The only information I have is the one publicly available, nothing internal nor private.
I met nobody who worked in that segment, or had business with Bill Hwang. Do they despise him? As you might despise him, because he bet too big, probably people could despise him in the same way. But apart of those reading the news, and everyone with their own personal opinion, I don't know if those around him trusted or despised him.

The losses were due to bad business. A bet he wasn't able to afford, built in a complex structure that didn't make clear what he was doing and how much he was risking. But as far as I know, this didn't fall to UBS: the episode closed when Archegos shut down, so there is no risk on that from UBS. The actual currently related losses are the reputational damage of the division, so in the sense of redemptions and difficulty to get new subscriptions or assets, and maybe there is still some fine. But that's it, the business is closed and the contracts are worthless.

In regards to the bullet swaps that CS sold to Hwang, how would a prime bank hedge these for a counterparty failure such as Archegos do you think?

Normally counterparty risk is controlled from the margin system or, in case of OTC derivatives (like it was in this case) by collateral. And collateral was indeed sufficient to the exposure Archegos had. The problem is, they found an illegal way to get exposure also with other banks or instruments without disclosing it, thus the margin/collateral was actually insufficient, but their brokers didn't know.

Just to head off all the Wolf of Wall Street questions, what are your thoughts about The Big Short?

I loved it and watched it a few times as a graduate. It gives a very clear understanding of what happened, of course in layman terms. Needless to say I preferred the book, which went much more in depth.

What's the next one gonna be, I don't believe we came close to killing all the roots of that beast.

Seems we're just waiting for the next shoe to drop.

It's very hard to predict, contrarily to other comments I see (but maybe they are geniuses/very lucky and I am dumb! I cannot exclude this option).

Greed and fear can make people do the weirdest stuff, and usually that is also complicated and difficult to spot. Some mention ETFs as a big bubble, some others discuss about options (the latest are 0DTE), but I believe that is really unpredictable. I would just keep away from complex things I don't understand.

Do your strategies beat the market? Do you have different strategies that only work well if certain market/economic conditions are in play?

To develop a strategy is no joke. I have a couple "beating the market", in my case the market being BTCUSDT HODL (I manage a crypto fund). But they are event driven, they need the right environment and moment in the market to provide good performance. The target is to always be market neutral, such that investors can combine it with the market, and obtain more sustainable, long term returns.

What tv series showcasing your line of work that is closest to the real thing?

I don't think there's one, but what I really enjoyed back in the days was the movie Money Monster, with the Quant stating that "the algo" was not the problem, but people using it... Although now I see how managing money is difficult in every respect, especially when discretionarily.

Have you watched Billions?

I didn't but I will give it a try!

I would recommend "Industry" (2020).

Added to my list!

Where would you put 150k today?

Today, a property might be very expensive compared to what you might get in a few years, if inflation goes down.
Without knowing your goals and horizon, I can only say, passive investing is the only way, unless you identify very good funds which can actually add value compared to their benchmarks. And of course, diversifying in asset classes. I wouldn't be too heavy on fixed income as volatility is crazy as of today and in general in recent years. But you can also consider alternative asset classes like commodities.
Investing in equities this year might be an opportunity, as I feel they trade at a discount compared to 2021, and the macro trouble might be solved soon. But always be careful and don't take it for granted.

Do institutional players typically outperform retail investors in the long run?

Yes, although the institutional investors can be segmented into many different groups. It is true that HFs underperform almost always, however, retail investors did not usually have the "power" to invest properly. Nowadays this is shifting, and memestocks are a clear example. What Buffett does remains unique, but other institutions are not necessarily that successful, and retail traders are learning more (just look at education, how many MFE and Quant Finance MSs are there...) and have more tools (Interactive Brokers, Robinhood and the likes).
And also, the industry is quite stagnating in terms of good new ideas. Recent trends like ESG and thematic investments (ARKK) still have a long way before they can prove to be worthy, especially if you compare with passive investments and especially ETFs, now available to retail clients and often more rewarding than sophisticated active investments.

Why do shorting and options exist in the market? If you believe a company is failing then simply dont invest in it (instead of shorting). Options are just gambling. What ever happened to simply investing in a company you like without all this gambling/derivatives?

Your point is more philosophical than market related, and it makes sense of course. Why do you want to bring down something you don't believe in?

From a market perspective, however, if you buy, someone will sell. And the one selling is either doing it because they don't believe in the company, or (in case of a market maker) because they just do business like that, buying and selling stuff to clients (simplified).

If someone wants to bet and borrow something to sell it (this is eventually short selling), we can't avoid that. People do the most riddiculous things, even betting on horses.

By the way, options were born to hedge, so in some sense we could say that the tool made sense, even if we look at it from a theoretical perspective (it's an insurance, price goes down I get refunded, and it is not a case that the price is named "premium"). Short selling options could be seen as a bet like short selling, I agree. There are interesting books and discussions about it, you should definitely read something from Laurent Bernut.

Do you think the shareholders of the banks that failed will be getting anything, and if so, how much? Could you go over each bank?

Generally speaking, shareholder will not get all their investment back, if anything, in case of bailout or bankruptcy. But they will, as the country saved them.
I don't have the details on a bank-by-bank basis, but from what I read, there are many lawsuits due to failure in communicating the problems of the business for e.g. Credit Suisse and SVB. This is a typical scenario, as investors try to protect themselves. I believe they will get part of their investment back.

"But they will, as the country saved them."

What does this sentence mean exactly? Are you saying they will get something because the country saved the banks? But at the same time, you're not entirely sure, as the last sentence says ("I believe")?

I am not entirely sure, indeed. This is a highly volatile domain. The stocks have some value, and potentially shareholders can sell their stocks on the market, so the money is still there. The only concern in my opinion is for major shareholders, which usually are holdings or financial companies, as they can have harder times selling their shares. But if the price is too low, even if the company went bankrupt, you'll still find some buyers who want to buy the dip, especially after there is a plan to save it (acquisition from other banks).

How far are we from seeing AI taking over investment decision making? Has that been implemented at hedge funds?

From my experience, AI needs a bit of fine tuning before taking over the scene. Many wealth managers (which still have a massive market share in terms of AuM) and even asset managers still don't even use ML, preferring to control their investments in a discretionary way.

what about citadel using chatgpt? whats the angle there

Citadel is one of the most innovative companies amongst big players in HF. I wouldn't be surprised if they come up with good use cases and implementations of ChatGPT-based strategies and algos. However, they normally keep it very proprietary, so we would know maybe in a few years...

How bad where the Archegos swaps truly? Was this the straw that broke the camel's back and will UBS be able to unwind?

Re UBS: I don't think it is an easy task, but most of the reputational damage was linked to the CS brand. Now things will improve. My feeling is that UBS is seen as the older brother saving the younger from his mess.
Moving on to Archegos: they just didn't meet margin requirements, and did it anyway by eluding controls. This means you always need to be careful when dealing with clients, but CS wasn't careful enough. They surely had a huge weight in what happened to CS this year, at least reputationally, probably much more than with direct financial implications.

What are the risks of investing in money markets funds?

Great question. As all fixed income investments, they suffer from credit risk and interest rate risk. Moreover, we can always consider credit risk.

Depending on the maturity, you will have a higher or lower sensitivity to interest rates. Thus, if rates rise, the value of currently issues money market funds will decrease, and vice versa.
Liquidity is usually not a problem, but still, when you manage large amounts of assets, it must be considered. Liquidity is expressed as how easy it is to find a counterparty to your trades (buy/sell).
Credit risk is also not a problem on average, but still, you need to receive your payments and changes in credit scores can affect your investment, depending on the case.

As for all investments, we need to mention also inflation risk (money markets usually have low returns) and an important hidden cost, often overlooked, is opportunity cost (isn't there any better alternative on the market?)

Opportunity cost is often overlooked because (IMO) typical investors are not knowledgeable of the different opportunities, they don't have the interest or discipline to inform themselves, and they don't have the risk tolerance (or the financial wherewithal) to take advantage of some opportunities. For example, a house is typically a worse investment than other opportunities, however it comes with the included discipline of monthly mortgage payments (for most people) and controlled risk (the lender forces reasonable insurance, etc.)

Absolutely! And even if they know, not all opportunities are easy to spot, and many behavioral biases could prevent them from allocating differently (anchoring, confirmation bias, information asymmetries etc)

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It's not exactly like this, firstly, it was Citi, and secondly, it was the OMX Stockholm Index, not their GDP. GDP is a statistic reported on a much less granular time than the "flash crash" of OMX (which lasted a few hours, I think).
By the way, he added a 0 by mistake, and probably sold a bigger quantity of futures or similar. I'm not entirely familiar with the matter, and I don't know how many details we have from outside.

I inherited money and it’s with a wealth manager. what questions should i ask him to make sure he is doing a good job and not screwing me out of money?

also, if i were to move away from him and do it myself, could i just leave the money where he has everything since i don’t know stocks?

Having a wealth manager is a good idea. You have to entrust someone with your money, and if you cannot manage it yourself because you don't have the tools, it makes sense to ask someone else.

ETFs make also sense for the long run, and that is what I normally do. A long term passive investment doesn't disappoint. Probably you'd like to mix equities and fixed income, unless you have a very short term horizon and you prefer to keep mostly fixed income (although the current env doesn't help much). But if you are not sure or even don't know what ETFs are exactly, a wealth manager is the only way.

Banks are about to cascade fail, who am I buying Puts on first?

I don't think that's the case. The biggest don't fall. You can see if you find any opportunity to profit from one of these crashes, but options normally anticipate market moves. Take a look at financials, reports and news, and be quick, if this is the game you want to play.

What would be your top 3 growth stocks for a longer time horizon. 5plus years?

I'm not really a stock picker, so I will not give you 3 stocks but rather 3 sectors which I like. It's all based on the direction of the businesses in that area and the expectations I have for the future, so no true financial and market analysis. Before investing you should always carefully research the company and general economic/social background.
1) Tech -> I know, it's no news, I like the sector and I believe it is very hard to pick winners as things might change dramatically or unexpectedly (COVID). However, many developments are contributing positively to the industry as a whole, from AI to VR, IoT, blockchain, cloud computing and quantum computing. In general, the long term trend is positive and I don't see why this shouldn't continue.
2) Renewable Energy -> it is not only a growing sector, but also ethical and supported by many big players in the investment world. It is set for skyrocketing. Many countries are investing heavily to increase their share in produced and consumed energy from renewable sources. And EM have many good natural resources (just think of Africa's solar power potential, for example), which will definitely be exploited by DM with offshore implants as well.
3) Electric vehicles. They disrupted an industry which was not only saturated, but also hard to penetrate (and Tesla made it). Now EVs are like the iPhone, everyone wants one, a status symbol. And currently they need to massively improve in their waste management and production costs (including environmental factors). I believe they will continue to be in a positive trend for some time.

We’ll see. Renewable energy companies especially EV stocks have been terrible through the years. We’ve been hearing the same thing about those companies/markets forever. I’ll check back with you in 5 years and see how you did. :)

This is also true, but the industry is truly growing (re: Renewable Energy). Actually, the biggest winners will always be single companies with some edge (new technology, unique product, etc). But if we invest in staples or industrials as a sector, we'll get nothing, in contrast to investing in the single winner. By the way, not a stock picker so I can be very wrong :)

When trying to quantify risk, how much collusion do you factor in?

It is always hard to quantify risk. Risk like reputational risk, or illegal activities, can't be quantified. But it is hard to even quantify other well known risks.
The job of a risk manager is hard, especially if you are not doing it just to report the numbers to regulators, but actually manage the risk and minimize the impact of unexpected events. All metrics are only an indication, and the qualitative judgement + experience can help you in better manage surprises due to collusion, fraud, and the likes.

What would happen if we put a 0.5% federal sales tax on all stock/option purchases made outside of 401k/IRAs (and private business acquisitions as well) and used it to reduce taxes on wage-earners and balance the deficit?

I am not sure of the total amount that the US would earn from this, but we would definitely need to reduce the fees on exchanges or the burden would be very big for retail investors. I think anyway it would be a possible disincentive to retail trades which might reduce the number of speculators and waste of money as a whole. But I am just supposing.

As a first year cs undergrad, what should I focus on right now to pursue a career as a quant in the future?

As a fresh graduate, I would have answered math, algos and financial markets. However, this is not really the point.

I believe the most important skills to learn are practical. Get your hands dirty playing with data, building nice codes and samples of work, understanding the concepts. Of course you probably have to fill some gaps in finance but that's even easier than the math you see in CS. If you really want, just start from blog posts on whatever strategy/portfolio optimization/analysis and try to understand it. If you don't, split the pieces you don't get into smaller ones, until you get to the point that you know what you need to learn.

Also, please don't invest. Do that only once you understand very well what you are doing in all respects. The initial knowledge is a mix of law, math/stats and business. After that, you might have a grasp on the basics, but in practice they don't work. You surely need to go deeper and deeper over time, so go step by step.

how did you personally contribute to the downfall of CS? What lapses in risk management did you personally observe while you were there?

Fortunately, I was not involved in either of the scandals that CS has had in the past couple of years. I was inside of it, but as if it was an external company, because I had no connection with Greensill, Archegos or the likes. Risk management is generally complicated, and I think the problem in my company was not particularly different from those in other companies (I even worked in the counterparty risk management division, but what I did was completely uncorrelated with the matter).
What happened has more to do with controls closer to the two companies. Greensill had some funds with CS, which I wasn't even aware of until the scandal, and those funds were collecting securities from other companies which were left to Greensill to control. And they didn't control, as well as CS didn't contribute to manage the risk.
For Archegos, I think a good resource is here: https://papers.ssrn.com/sol3/papers.cfm?abstract\_id=4065946

Have you heard of any use case using Reinforcement Learning (RL) for stock trading?

There are some, but we must always find the right application and setup (which does not mean parameters). A RL model can be helpful to allocate given some signal, but maybe it doesn't make sense to use it for both signal and allocation. At the same time, it might be helpful to find the optimal portfolio weights for a portfolio, but maybe not that helpful if we use it for time series.
Recent papers have also shown how better it is compared to usual asset allocation models. It might be worth exploring it, but the difference between Markowitz or Risk Parity is that the way you use it might be profoundly different from the paper. So the best way is to test it for our use case.

Is cash still king in this crazy economy? or will inflation just gobble it up? any precious metals that have your attention these days? Thanks!

With this inflation, cash is all but king... Not a commodity expert but gold and silver should be winners for a few months still.

Hi there! Full-time retail trader here, up roughly 80% YTD. Two questions for you, if you get around to me:

1.) Prior to big market moving events, such as tomorrow’s CPI release, how do institutions typically hedge against potential large moves to the downside? The last two trading days have had the lowest volume and tightest range on the indexes in years, and I was expecting to see some risk-off moves that never came. Curious how institutions typically prepare for events like this.

2.) What is your view on how 0DTE options have effected the overall market since their inception? Do you believe them to be a net positive or negative on the market as a whole?

Thanks for your time!

Thanks, awesome questions!

1) They just try to anticipate very well in advance the move, sometimes with a 50/50 probability. However, when approaching releases, it might already be too late. Also, not all releases have a huge impact, especially if they meet expectations.

2) I believe they are a tool, and as all tools, they might bring benefits and risks. The risk here is that the whole market will dramatically suffer from any crash, and there are many papers about it. The original idea of options was to use them as insurance contracts, but we moved from there already a long time ago. Hopefully we will see some control from regulators to avoid lightspeed crashes. They definitely are more similar to bets than insurance contracts.

I shorted $5,000 of Gamestock stock when WallStreetBets had it at $50 a share. I figured it was easy money. I woke up to a margin call and lost $350,000. I tell myself it was a black swan event.

Am I an idiot?

You weren't an idiot, you traded following your emotions. This is a wrong approach, but with experience it will get better. Many retail investors do similar mistakes...

The main problem is, we need to truly understand what the risk is and when to stop if we trade this way, including stop losses.

Are -you- successful in the market with your personal finances?

I invest mostly in traditional finance for my personal objectives. Returns after 4 years are moderately positive, but I am satisfied with them, given the current environment. I am anyway mostly a passive investor, as my target is not really to beat the market with my personal savings.

What's your biggest area of stress on the back end or technical side of things?

It seems that most information out there seems to point at there being a lack of cloud deployed in the financial world, in favor of relatively antiquated on-prem environments. While there are some things on cloud, there are certainly optimizations and/or cost cutting opportunities out there that would be great options for wall street.

The biggest challenge seems to be data tenancy and security, but there have been huge strides made over the last couple of years.

Just curious how it affects what you do, or what you'd like to see improved from a "kit" or workstation perspective, whether it's software, speed, etc.

Thanks!

I would say, I work with cloud machines (AWS, Azure, etc) and it is mostly fine. Of course I'm not a software engineer, so probably that kind of heavy-tech work could improve my infrastructure, from efficiency/latency to memory issues and security.
I'd like to see an easy and cheap way to store data in a customized database, maybe with point in time data. That would greatly help, as at the moment I have the infrastructure to source APIs and I worked to make it uniform, but if providers change/manipulate data results might be different. And also, I'd like to store data which doesn't come in a database, like some websocket connections, but it needs some time to setup the machine and functions to store it, and design the database properly. In addition to the already complex task of making sure it is robust to changes in the format.

do you ever (or routinely) hedge your investment calls? im speaking specifically of taking a long position in a particular industry leader while simultaneously taking a short position on the industry as a whole (or something similar to this idea anyways)

ive heard that this is how hedge funds operate but im confused as to what the desired outcome is…unless of course the desired outcome is simply TO NOT LOSE MONEY lol. but even then it seems like a crazy haphazard method of investing…i assume u would have to carefully select the right ratio of calls:puts for every investment to achieve a desired outcome.

Absolutely! This is called a relative value trade. If you buy one company and sell the industry, you are conceptually hoping that the gap between the two will reduce. In particular, if the company is over- or underpriced, the industry will basically catch up with it (or the company with the industry). It is smart but of course the risk is that the gap widens somehow. Normally these trades have small return and small risk.

Hey Marco! Two quick questions.

1.Is there any reason not to invest in levered funds like TQQQ and QLD long term? I’m fully aware of their heightened market risk and compounding risk, but I’m young, not risk-averse, and investing for the very long-term. As such I see no reason to go with regular market index ETFs when historically their levered counterparts have been doing quite a bit better return-wise (especially when you dollar cost average your contributions)

2.I just finished my undergrad in finance and you basically have my dream job. I’m taking courses on Python, machine learning, trading systems and risk management right now. I also read papers from the field whenever I have time. What advice could you give for getting from where I am now to being a quant? Is there an entry level job that would be a good foot in the door to get there?

Thanks a lot!

1. There is no reason to avoid them, as far as they have a low leverage. The problem with leverage is about margin calls, which can lead to lose more money than the initial investment. But if we control it to say 3x, that should be fine, as fine as this is in line with your expectations and risk tolerance!
2. Absolutely nice! You're on the right path. What you would need the most is experience with data and tools, practical considerations (data pipeline, databases, fit/validation/test routines, etc) and probably an entry level job can give you a more solid grasp. If you like to play with algos and strategies, it is likely much easier to do it yourself, as jobs might be hard to get. This doesn't mean you shouldn't try! But maybe you can consider also quant jobs from the less exciting side of things, or data science jobs which have strong overlaps with the field. Keep in mind that algo trading and systematic strategies are very difficult jobs to get, and you need to learn. So don't lose your hope and continue on the side dedicating some spare time on learning.

Heading into account management post MBA at an asset manager that focuses on fixed income. Thoughts on sustainability/longevity of this career given AI / growth of passive funds? I’d be handling institutional clients.

Lastly I don’t want to take the CFA - do you think this will be a barrier of growth for me in the industry?

Honestly, if you have an MBA in relevant fields, the CFA doesn't teach you much more. Experience is more valuable. I see the CFA more of an opportunity to integrate if you have an education in fields not related to finance. It is definitely not an impossible-to-overcome barrier.
Sustainability, well, AI and passive funds are fine but there will always be companies delivering more to their clients. Just ensure you can really learn from your job, and try to deliver results that truly beat them. It's not easy, but AI is still early stage and I think it will not take over before at least 10 years. Companies, especially in financial services, are slow to innovate.
Exciting job, good luck!

I’m a believer that an S&P500 index is an excellent choice as the mainstay of a long term investment (10+ years). My brother indicates that the S&P should only be (I think he said) 50-70% of the total, tempered by bonds.

If I understand things correctly, the S&P has historically done better than bonds over pretty much any long term window, so his statement doesn’t make sense to me. He says it checks out though.

Is my brother correct, and if so, how does that work?

I believe the 60-40 portfolio doesn't make much sense nowadays. Bonds are very risky and diversification is almost 0, plus their returns are not extremely attractive. For 10+ years I would even go 100% stocks, or anyway no less than 70%. One should just keep an eye on actual diversification: the S&P500 is usually very concentrated. Maybe keep a small portion of the portfolio in EM or EU equities.

Why do they say, you cannot predict the future from historical data, but yet some people do. Ofc nobody is talking about chart astrology, but with the right model it should be possible to gain some edge somewhere, right?

It might be possible as far as we identify models (and, most importantly, data) that can somehow find or approximate relationships between variables. The problem is, some parts of the models (hyperparameters) cannot be modelled in an easy way as of now: how often should we train our model to predict the next outcomes? How to select variables over time, if new ones are added in databases (say, a new social media sentiment variable, or stuff like this)?

From a broader perspective, markets are a level 2 chaotic system, thus the forecasts we make impact on the future developments of themselves. In this scenario, you can never predict accurately, or at least not consistently over time.

Is linear regression and its variations really the most common tool of analysis used in model development?

Definitely, even non-quants have learned to use it. Practitioners use it on a day to day basis, although it is often not the ideal model (but still, easy enough and probably better than spending a lot of time on ML models to get slight improvements, if any)

What do you think of the future of quant traders within the cryptocurrency space?

I think the space moves extremely fast. Now Quants are developing AMM protocols and tools to provide fixed income to investors, for example. New applications are always on the rise in crypto, and the fact that there is little regulation helps in expanding them, although we must be careful with scams.

Which is the most annoying day count convention?

Of course everything with actual, which means you have to count for every year. The worst is likely actual/actual. I didn't have much to do with those fortunately as BO normally takes care of them.

Thoughts on Kris Sidial’s recent white paper from the Ambrus Group?

You mean the one on 0DTE? It is very clear to me that they add a lot of risk, as he states at the end of the paper. I think for everyone with a basic knowledge of options that will be clear, as the short time can only be seen as an opportunity to earn theta, and if the market crashes, they will almost certainly amplify the magnitude and speed of the crash. So I generally agree with it.

What academic background do you have?

I hold a Bachelor's in Business Administration and Master's Degree in Quant Finance from Italian universities. I also helped in a project with the University of Limerick and I was a guest lecturer there.

What’s the best way to diversify a portfolio please?

It's a difficult question. It depends on your resources, what you have access to, and how much money you manage. In terms of retail traders, probably you should go into ETFs, being careful about A) industry concentration B) geographic concentration C) asset class. And of course, keeping in mind the expense ratio and tax implications.
I put the three criteria in this order as I believe normally people only look at C, but A and B are equally important.
Also, forget about Markowitz or more complex asset allocation models as a retail investor with a long term horizon. It doesn't benefit that much and it might be complicated for you.

I'll be that person!

How should one implement ETF strategies?

And

Why are systematic strategies often wrongly implemented by retail investors?

Thank you 😁

Great questions, I was waiting for them!!
ETF: we have many ways to implement them. I started a series about it, where I discussed factor investing. It is one of the oldest strategies, yet it might bring some improvements compared to passive investments. Generally speaking there are many ways, trend following, mean reversion and statarb. As a retail trader who likes to play with data, one should definitely test multiple asset allocation models and generally speaking for longer term horizons. HFT is for those who really study market microstructure.
Systematic strategies: retail often have misconceptions about systematic strategies. An example is technical analysis, it might work in your setup and with some rules, but it is usually unsustainable over the long run. It's not completely useless, but it can't be the basis of your strategy, especially if you think many are using it. Not everyone can be successful, and success comes from study and more sophisticated ideas, or data.

What would be the questions you'd like AI to answer for you, to best help you do your job, if it could scrape stock data?

I would definitely ask it to find forecasts on the economy or financial data, build models in my place, build strategy components like advanced asset allocation models and similar. I wouldn't ask it to research directly, but rather to facilitate the development of tools.

Thanks for the AmA!

In your experience, what's the most common mistake that investors make when it comes to portfolio strategy, and how can they avoid it?

I think overconfidence. Whatever model, idea or setup we have can fail. What we truly need is to identify relationships, then model them (from a quant perspective).

In terms of strategy, we can never be certain of an approach, so we must properly monitor A) markets B) our ideas and their validity. And we should always keep in mind that the best (discretionary) PMs would have a 50% hit ratio, and we are probably not the best PMs :)

To avoid it we need to 1) study what is discussed in the industry 2) avoid giving anything for granted and 3) hear others' ideas and try to always learn a little bit. And of course portfolio concentration is one possible reflection of this bias, so this should also be avoided.

I’m doing a PhD in economics.

Is going into quant rewarding? Did you or any of your colleagues do PhD’s? Should I take my research skills and help the world instead?

I love the job I do, honestly I would not change for many others. Some of my colleagues had PhDs, yes. I would definitely follow what I like, if you prefer to find applications that are more useful to the world, it makes sense. But I think the industry is under profound changes, as active investments are not really worth it and assets are heavily misallocated.

What are your thoughts about governments and other public entities posturing regarding not doing business with investment firms (or other entities) that include ESG in their forecasting? Isn’t this somewhat shortsighted? Shouldn’t all investing entities take those into consideration? Are they just hiding the fact they do so?

ESG is a great thing, however, it's also hyped, and an early stage metric without clear standards (this is changing but not finalized yet). Many ESG funds, stuff like "alternative meat ETFs", eventually invest in Apple and Amazon just because they technically don't produce meat. So be careful about these scams which are very common.
By the way, what investment managers care about is making money to maximize fees. I really hope they will also try to avoid investing in companies damaging the environment or society, but in practice I think it's not really their focus, apart of marketing efforts. So I would say yes, every company should take them into consideration, but as a life choice: if I do my job, I don't want to harm others, even if I cook a pizza and use bad ingredients just to save money. Then of course, it's up to ourselves, which means that often greed wins.

Why do investors and private equity companies ruin companies by having them make poor strategic decisions that have only a short-term gain but guts the company for long-term growth and stabilitiy?

Because of greed. The problem is, we need to truly have a long term perspective, and avoid being greedy (I might be wrong, but I feel like Warren Buffett is of this opinion and mood when he makes investment decisions).
It's very nice to see our bank account receiving 200k in a day, but we often forget that easy come, easy go.

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This makes sense if you have a long term perspective, like 5-10 years at least. And the risk depends on their allocation and management style. Overall, if we keep 100% of our portfolio in equities, they can see their value decreasing or increasing massively in a single year, but over the long term you should be confident that the value will most likely increase.

This is Reddit so I have to ask. Do you consider yourself a parasite who is wasting their talents on greed rather than making any significant contribution to society, but instead contributing to the main factor (wealth inequality) that is causing the apparent collapse of American society?

I don't feel a parasite, because every job might be seen in the same way. If I had a very successful luxurious restaurant, what's the contribution to society?
The point is not to necessarily save the world with your job. You should start from people around you, and then those who need the most, but not necessarily by working as a doctor or similar. And with your private money you can truly help anytime with whatever job, of course you are not forced to, but you can help.

Finally, if we manage to have an honest company in an industry were scandals are around the corner, this is already a good contribution to society. We can avoid "parasites" getting more money and damaging others. It is all up to you.

A few years back I cofounded a discord based wealth management group where we had this sort of "back-alley" mutual fund service ran by tradingview traders I picked, and financial education part where we would teach subscribing members about technical analysis and investment strategies.

Tbh I personally never believed in them since our profits derived from memberships and fees and most of our investing users were at a net loss; we were in the business of selling hype.

So my question is, does technical analysis ever work? Is it ever implemented by a quant strategist in a way that yields returns? (Stuff like Ichimoku clouds or Fibonacci retracements for example)

I think this is a business many get into, but eventually only a few have it profitable. Indeed, TA is normally not profitable by itself. It must at least be combined with other tools (if used)

Hi, I am someone who has a Ph.D in pure math, and am interested in becoming a quant myself. I imagine it would easier if my degree were in probability/statistics/economics. My question for you is: What actions would, in your opinion, give me the best odds of being hired as a quant? I have filled out some applications, but have gotten exactly one phone interview, and no job offers.

My current plans are to study some portfolio theory, refresh myself on probability and statistics, that sort of thing. Anything else? Are there any helpful books you would recommend? Are there certifications you can get that would make me a better candidate? Thanks for your time.

I don't think it would be easier. The point is, quant jobs are limited and there is a rising offering, while many teams and companies still don't know exactly if and how to use quants.

By the way, I think your plan sounds right! Certification and stuff is only to showcase, but what one truly needs is hands on experience and the capability to answer those annyoing interview questions that maybe don't even show how technically sounded you are, but still, you need to answer them right or in an "interesting way". So maybe try focusing on improving your CV, showing what you can do (especially at the beginning of your job life) and what you know. Any certificate that improves your understanding, even Coursera, is welcome.

How would you respond to the theory that continued interest rate hikes are designed and intended to cause bank failures and allow large banks to acquire smaller ones at a discount?

It is a conspiracy theory that doesn't really hold. Banks are also suffering and losing billions, and acquiring these smaller banks is probably much more of a burden for them. I am in Switzerland, and the recent events at CS and its acquisition from UBS are certainly seen more as a problem for UBS itself.

Why is it a burden for UBS? They pretty much monopolize the Swiss private banking sector now, and taking over those CS accounts (>1 trillion CHF) means steady fees if they don't do anything stupid like CS did

Yes, but you are not considering the additional salaries, complexity in the infrastructure which is not needed (just imagine how many duplicate tools they will have for HR or admin stuff), they will need to cut costs and spend months and months to review their organization and setup. It's ok to have much more market share, but it does come with a huge cost, especially when a business like CS wasn't much profitable and you will also need to improve what they were doing.

Moreover, Credit Suisse itself wasn't a small bank, yet they went bankrupt

Was CS's failure a result of interest rate environment or purely driven by those scandals they got themselves in?

Great question! I would say that it was linked to the reason why these scandals happened. The bank was seriously unorganized as an entity and controls were not deep enough. This is why the scandals happened, and as a whole, the business was not prepared to recover from them.

Do you think that if a retail investor is using low cost index tracking etfs to make a portfolio that diversifying via factor tilting is valid strategy? For instance, targeting large-cap and small-cap value while avoiding mid cap?

I think that is a possible approach, yes, but you must have a clear reason why you do that. For example, we could argue mid cap underperform in inflationary environments for reason x and y, then you do this for this year until inflation goes down to say 2%. This is the kind of simple portfolio management one can do as an individual. Always keep exposed to the broader asset class anyway, and don't get too crazy with the weights.

Currently using reinforcement learning to build a trading bot...

Do you have any recommendations?

If i can get decent returns from this (and let's be honest this is a big if), is this something that can be sold to other investors?

If it works, everything can be sold, but you will also need to clearly motivate why it works, and the "why" can't be "because the model is good". Maybe I would start by testing it live with my capital or paper trading. If it works, you can move on to offering with live results.

By the way, do it, but not in a forecasting fashion. You should rather target portfolio optimization, maybe feeding the model with classical asset allocation outputs (Markowitz, Risk Parity, etc). This would be much easier to manage and with higher chances of getting something out of it. If you make the model forecast, it is highly unlikely that it will work, especially when you only use OHLCV data.

How to start learning to invest? :)

Great question! I am going to update the link of this AMA with some books that might help. Some might be advanced but I'll try to also add useful paper and educational material for total beginners. Stay tuned!

Bond market is pricing in for a commet strike next week, equity market is pricing in for business as usual. How do we construct a portfolio these days?

Not easy times (is there any easy time?). I would say that after last year, equities would hardly suffer similarly, but nobody knows how geopolitics and inflation will develop.

In terms of methodology, this is exactly why I prefer to have market inefficiencies in my portfolio, rather than a single asset class as a whole. But for retirement savings, I would say, apart of the usual disclosures (this is not financial advice, it all depends on your long term goals and risk tolerance, etc.), that we should be cautiosly optimistic for the end of the year. Bonds are likely wrong this time, or at least overreacting.