Blockhouse Archives

Balyasny's Global Head of Quantitative Research Giuseppe Paleologo (@__paleologo) on the LCH study showing just three firms, including Citadel and Millennium, made 38% of hedge fund P&L over three years: "There was this LCH study that showed that 38% of the P&L in the past three years in hedge funds was generated by three firms, 38%." "So this tells you how concentrated the industry is, and it's getting more concentrated." "It's crazy, 40% of AUM is passive." "Passive used to be zero. It's almost 40%."

CNN AI correspondent Hadas Gold (@Hadas_Gold) on Nvidia losing Jensen Huang with no succession plan, days before Tuesday's earnings: "Nvidia famously did not have a succession plan. Jensen Huang was very much against a succession plan." "He said that he just wants everybody to learn how to run the company, but that he wanted to run the company until he dies." "Now he is out. He is completely out of Nvidia." "They're actually supposed to be reporting earnings on Tuesday." "...even though Nvidia's business is still very strong, people still want their chips..." "...a CEO like Jensen Huang who is out, that is going to cause some challenges for the company." "So it's just hard to overstate what a earthquake this is for the AI industry."

Citadel founder and CEO Ken Griffin on what a market maker like Citadel Securities does when you sell $50 million of a stock: "Which means that when you go to sell $50 million of a stock, if there's not a buyer in the market at the exact same instant, you're not pushing that stock price unduly." "The market maker will use their capital to facilitate your trade, and then will hope to find the eventual buyer of your stock at some point in the future." "In the United States, we trade almost 25% of all the equity that trades every day."

Tudor Investment Corporation founder Paul Tudor Jones on watching Bunker Hunt's silver squeeze collapse in 1980: "...I think this silver here is the most valuable asset and resource on Earth." "Someone asked him, 'What are you gonna do with all that silver?' And he goes, 'I'm gonna bury it.'" "...he buys 20 million ounces at 35 bucks." "...it goes to 50 bucks, so at 50 bucks now he's worth about 11 billion..." "The commercials had been just eradicated, because they're sitting there holding physicals and having to put up this margin every day." "...made it liquidation only. Silver collapsed. It went from 50 bucks to under 10 bucks in the space of about eight weeks." "...that had a searing impact on me..." "Right then and there, I would never own anything... or trust anything for the rest of my life."

Jensen Huang founded Nvidia 33 years ago. Bettors now think he won't even keep his seat on the board. 65% say he's off the board by year-end. 91% by 2028.

Balyasny Asset Management founder Dmitry Balyasny on 2008, when Lehman went under: "When Lehman went under, we made the decision to go to cash... People just wanted their money." "I remember like sitting, waiting for the money to come in from the prime brokers... 'No, no, like the wire's coming. It's, you know, check's in the mail.' And we're like, 'It's not here.' Like day after day, it's like, 'It's not here.'" "The CDS indicators, you know, and the spreads of where the market was pricing the credit risk of the banks who we were, you know, getting our money back from was like exploding." "We wound up getting hit with redemptions for probably close to 50% of our capital. And we decided not to gate people."

Two Sigma head of complex feature engines Ben Wellington on what scares him about AI in quant investing: "Everyone says automation. Let's automate everything, and it sounds right." "If I'm building a cardboard box automation, I want the output of that thing to be the same every time." "The thing about adding alpha to a portfolio is you want the opposite... We want orthogonality. We want originality." "If you give everyone a tool, a push-button tool, and the tool is throw all your data in and make a model, and they all hit the button, and they all point at the same place." "That's wonderful, but we're all doing the same thing, and that's terrifying to me for AI in an industry like ours where diversity is the point."

Third Point founder Dan Loeb on the hardest investment lesson he has learned: "I would have to say our investment in FTX." "We could verify it all on the blockchain." "We felt like we had some good company on the cap table with us. We did." "...it wasn't what we thought it was..." "I will say that now our due diligence process, we definitely, like, check bank balances and do, like, the most basic due diligence..."

AQR co-founder Cliff Asness (@CliffordAsness) on a fundraising quip he now calls "staggeringly wrong": "Here's where I was a complete idiot. In going around to raise money in the first six months, I must have had 20 clients say, 'We don't need 22% vol uncorrelated to the market. How about you do a quarter of that?'" "I responded... with a flip tone, 'You want a quarter of the vol? Give us a quarter of the money.'" "I still refuse to admit I was wrong about the math, 'cause I was not. But I was staggeringly wrong because it turns out, Corey, this'll shock you, that down two standard deviations at 20% upsets people more than down two standard deviations at 5%." "Having served on many an investment committee since then, we do not call in the largest standard deviation event. We call in the idiots who are down 35%."

Former Enron gas trader and Centaurus founder John Arnold (@johnarnold), on building "the best seat in the industry" after Enron: "I felt I was among the best. I had also managed to create probably the best seat in the industry." "...my first job out of college was at Enron. I started there when I was 21 years old in 1995... it went bankrupt in late 2001..." "...deciding to start my own hedge fund." "...the classic hedge fund two and 20 structure..." "...intermediary between me and the 20%, right? I was getting the 20%." "...we had very good financial returns early on." "Whenever we had a down month or a down time period, which we had, they weren't calling to redeem, but they would call up and say, 'Do you need more capital?'"

Campbell & Company CEO Kevin Cole on why there's no holy grail model in quant investing: "We don't believe there's any holy grail, or any single model that's going to be the answer in markets." "Markets are not perfectly efficient. But I do like the phrase efficiently inefficient, and that means to me that small edges can be found through hard research, but those edges do get competed away over time. And what was once alpha becomes widely known, it gets commoditized, it becomes beta." "The central risk we face as quants is overfitting, that it's pretty easy to find a good backtest, but just because you find artifacts in past data doesn't mean they're gonna hold going forward." "'Just because you uncover dinosaur bones in an archaeological dig, it doesn't mean that dinosaurs still roam the earth.'"

IDW Group founder and hedge fund headhunter Ilana Weinstein on why remote work made poaching hedge fund talent easier, with a jab from Point72's Steve Cohen (@StevenACohen2): "I will tell you, and maybe I shouldn't say this, but I'll say it, in some ways, my job has become a lot easier in the last couple years." Steve Cohen: "But you're charging the same amount." "They're working from home. They can more clearly see what their value add is versus other people who are maybe just benefiting from being in the room with other smart people." "This year, we have had, which I've never had before, people that we've gone after for years calling us, telling us they're ready to leave."

Balyasny Asset Management founder Dmitry Balyasny on the risk limits every BAM portfolio manager trades inside: "We allocate capital in the form of volatility dollars, and then somebody has an expected Sharpe, and they multiply that Sharpe times the vol dollars to arrive at their expected P&L for the year." "You have a drawdown framework that's very objective and clear that everybody signs off on day one, and that's multi-step, so you're not forced to reduce the portfolio by a large chunk at any one time." "In equity portfolios, you'll have idio versus factor risk limits. And you might say, 'Okay, your idio limit is we want you to run at least an 80% idio, 20% factor portfolio.'" "You have liquidity limits. You have guidelines on things like number of positions and concentration. So lots of things like that, that create a box within which that person can operate."

D1 Capital founder Dan Sundheim on owning Priceline when it was growing 40% a year at nine times earnings: "Booking.com, okay? Which was called Priceline back when I owned it. It was growing 40% a year and traded nine times earnings." "Yes, it didn't make a lot of sense. But like the narrative back then was like, okay, they're just like arbing Google, and like this is like a flimsy business model, whatever." "It's a lot slower than it used to be, and it trades at like 3X the multiple, right?"

Renaissance Technologies CEO Peter Brown on why RenTech pays everyone from the same pot: "Now, as for our secret sauce, of course, there's nothing I'd rather do than disclose in great detail all the intellectual property that we've spent decades and billions of dollars creating." "The company was founded by scientists. It's owned by scientists. It's run by scientists. We employ scientists. Guess what? We take a scientific approach to investing and treat the entire problem as a giant problem in mathematics." "We encourage people to work in teams. We constantly change those teams up so that people get to know others within the firm." "We pay everyone from the same pot instead of paying different groups in accordance with how much money they've made for us, and so forth."

Balyasny's Global Head of Quantitative Research Giuseppe Paleologo (@__paleologo), formerly of Citadel, Millennium and HRT, on how the three firms actually differ: "I'll actually quote a co-head of one of these firms, without mentioning his name, who once told me, 'Citadel is Singapore. It's centrally managed, it's very efficiently managed. Everything is clean and working.'" "'Millennium is the United States because it's federated. If you want, you could say it's siloed, it's messy, it's big, but things work out in both models.'" "I would add that HRT is a little bit like Wakanda. So HRT is smaller, in a sense it's cooler. The human capital, the quality of people, I think is probably the highest among the firms that I've worked at."

Citadel CEO Ken Griffin on the college put trade that made him study the market maker's edge: "in my college dorm as a freshman, I bought two put contracts in Home Shopping Network, and in some sense I owe my career to good journalism." "fortunately from the perspective of my career, the stock cratered shortly thereafter." "When I sold those put contracts, the market maker paid me less than their intrinsic value, and that made me very curious about the pricing of derivatives, because I realized that I got very lucky in buying those puts with an expiration that fell after the stock had cratered, but the market maker made a risk-free profit." "I was very interested in trying to learn about the pricing of derivatives, and that took me to understanding the pricing of convertible bonds, which is the area that I started in from my college dorm room when I, I began my first hedge fund."

PWL Capital (@PWLCapital) CIO Ben Felix on how a leveraged ETF went to zero after a market drop triggered its swap contract's termination: "a lot of the leveraged ETFs are getting their leverage from swap contracts." "But now you've got counterparty risk." "you've got the risk of the counterparty closing the contract after an extreme downward move in the asset, which has happened." "The, the swap contract had a provision for the contract closing if there was a certain downward move in a day. That happened, and then the ETF became worthless."

A portfolio manager can be wrong almost half the time and still be an all-star. Dmitry Balyasny on hit rates and why the size of the wins matters alongside how often they happen. In equities, a modest hit rate can still produce strong results: "in equities, we find, portfolio managers who have hit rates in the 50s with decent slugging could be very, very good" But that trade-off has limits: "It's hard to find somebody with, you know, 25% hit rate and enough slugging to kind of overcome that because there's just, there's just too many reps." Hit rate is only part of the picture. The other question is how much the wins make relative to what the losses cost.