Sopa Piranha - Investment Opportunities in a Market Dominated by Coherence

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Sopa Piranha - Investment Opportunities in a Market Dominated by Coherence

This month I focus on how to make money across all markets rather than a single market or strategy. The subject is coherence. The term comes from the physics of light and refers to a situation where nominally independent photons start to act in a coordinated manner. I have deferred to the term used by Zbigniew Hermaszewski (aka Zbysh), who runs a fund called Altis. Coherence is a time when all markets begin to respond the same way to news and behave like one trade. It is a time when all strategies in hedge funds begin to smell alike. This phenomenon is not new, but of course it has implications for making money. Recently we have all read that hedge funds can no longer make money due to the massive amount of institutional money entering the system. Too much capital chasing the same ideas drives down return. This month's Piranha Soup describes why this view is overstated. What we are experiencing is a normal cycle of coherence. "Crowding", in the form of more players in the same hedge fund trades, increases the extremes of coherence. Therefore, crowding in hedge funds is not a problem; it is an opportunity to be exploited. This issue of Piranha Soup takes on the whole market place in several ...

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