Ray Dalio on Global Economy

Pretty interesting talk around deleveraging, debt, and more by the Bridgewater founder, Ray Dalio.

Known vs. Unknown Risks

“	[T]here are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – there are things we do not know we don't know.	”
—United States Secretary of Defense Donald Rumsfeld As "Business is War", the above philosophy absolutely applies to financial trading, fund management.  An options trader may look at a far Out-Of-The-Money put option, and conclude that it's well overpriced using Black-Scholes valuation; the next question should then be, "is it really?"  From my experience, there're plenty of seemingly high reward, exploitable with low risk, lucrative market inefficiencies off empirical analysis; yet unobserved risks always exist. And as soon as money's committed, Murphy's law kicks in immediately, that 'Anything that can go wrong, will go wrong'; of course... Practical Risk Management  So realistic risk management for any business must take into account both known and unknown risks. In the case of market neutral fund management, this could be valuation model inaccuracy, liquidity shortage, actual transaction costs, asset structural change, term structure moves, short squeeze events, fat finger mistakes and etc.

Hedging for credit instruments (Yale Lecture Video)

Yale Lecture from Fall, 2009.



"
Financial Theory (ECON 251)

00:00 - Chapter 1. Fundamentals of Hedging
15:38 - Chapter 2. The Principle of Dynamic Hedging
24:26 - Chapter 3. How Does Hedging Generate Profit?
43:48 - Chapter 4. Maintaining Profits from Dynamic Hedging
54:08 - Chapter 5. Dynamic Hedging in the Bond Market
01:10:30 - Chapter 6. Conclusion

Complete course materials are available at the Open Yale Courses website: http://open.yale.edu/courses
This course was recorded in Fall 2009.
"

Hedge Fund Strategies (existing NZ funds all long + bleeding)

At Global Fund Data, it's possible to review strategies applied by successful hedge funds today, along with their performance profiles. Of course, specific strategy details are not available, as expected from any other form of trade secrets. 

NZ Hedge Funds

Interestingly, existing New Zealand funds are practically all Long & Hold types with large exposure to volatility, market risks. As the world braces for European sovereign credit uncertainties, volatility is expected to remain high for a while into the future. This is bad for any buy & hold equity / fixed income racket.
Today's market participants are much more sophisticated, Buy & Hold is obsolete as means of asset management.

As investors become increasingly sophisticated and aware of available alternative investment strategies, the local funds will likely have to adapt and offer better concepts to hold off redemptions.

The Complete Arbitrage Deskbook (book review)

This book is pretty informative for anyone new to arbitrage. Stephane Reverre explains a fairly comprehensive field of existing means of arbitrage (up to the year of the book, 2001), covering a very wide range of instruments and explains both technical and economical grounds behind the mentioned market inefficiencies.


Prerequisite knowledge

A good understanding of statistics is necessary to fully understand some of the concepts from this book. The reader is also expected to have basic understanding of corporate finance and familiarity with intermediate financial mathematics.


Some interesting things from the book

Mathematical explanations for Index Arbitrage opportunities and expected mispricings (Index futures vs. Spot ETF, component portfolio, etc.)

Risk arbitrage exploiting scheduled corporate events (mergers and acquisitions)

Existing statistical arbitrage (e.g. pair trading) means

Examples of actual arbitrage opportunities and exploitations­­ off empirical data