Very nicely put.
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I think that comparing investment in company stocks to a casino is profoundly misleading. Market optimism and exuberance has absolutely no effect on the outcome of games of chance – there’s nothing to inflate a bubble. The marketplace for scams and schemers who sell “fool-proof methods to win big” is not even comparable. Most sensible people enter a casino with the understanding that they will have some fun breaking even or losing. They don’t go in there looking for a long-term hedge against inflation.
In short, the average casino is considerably more honest about the risks of your investment than Wall Street could ever hope to be.
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The problem with a tax is it just becomes a cost of doing business, gets absorbed or priced in, and everything just goes back to the way it was*. A cap on trades is a permanent brake on HFT. How about a frequency cap and a tax? 
* Except education is now better funded, which is a win … at least until the next Republican Prez/Senate/Congress, at which point the tax either gets repealed, or something else has it’s funding cut so the frequency-tax has to stretch to cover that too. Or, given R behaviour in recent years, both.
That’s not going to happen until people and companies have other, safer investment options. In other words, interest on cash investments needs to get back to pre-ZIRP levels.
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There were no brokers either internal or external at HCM. There were a large number of traders. It had been a very successful arbitrage hedge fund (effectively) for many years. But the successful principal wanted more cash and left to form Convexity Capital. They specialized in “Triangle style” trades, but also other arbitrage type trades in fixed income and fx. I am sure they had some equity presence but it must have been quite small and was probably event arbitrage and stuff like that. Most of their trades were in government bonds, swaps, interest rate contacts and fx. And of course options on all of the above.
A large amount of the cash was put out to external management. Some of those managers would have been Algo managers like Ren tech, DE shaw, 2 Sigma etc. However those funds are hardly bargains in terms of the deals offered to external investors. Many algo managers restrict their “best funds” to their principals.
As for setting up their own internal algo, I think it would be a mistake unless HCM had been able to find a manager who had provable results. Indeed there is a case to suggest that many Algos are also breaking the law - although the SEC currently sees it differently. However one can argue that “order sniffing” is a form of front running. Of course, “algo” is not a well defined term. I referred to what are effectively market-makers. However do different things. That said, the funds which are price takers and take longer term positions are generally not as successful as the liquidity providing funds.
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You make a fine point. But I would advocate a available more extensive social security provision. Otherwise we are all forced into “shark invested” usurious waters!
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Thank you. That was helpful information. I like to stay abreast of these things, if for no other reason than to know what my primary financial institution is up to with my mutual funds and CDs. It irritates me to think that money managers at major hedge funds are getting paid commissions when algo trading and index funds can perform as well or better.
Given the size of the fund, wouldn’t HMC be able to attract proven managers and developers?
I guess my question would be, from a simple standpoint of competitiveness, shouldn’t they take every advantage regulators permit? It seems like interpreting regulatory law should be up to the SEC, while traders and funds job should be to follow that interpretation.
It irritates me as well but that business is currently dying. My suspicion is that rising rates will give these guys a huge opportunity to make easy money.
Could HCM attract top talent? I’m not sure
If you have a profitable business in this area why give it away to them. If you are a talented individual then you won’t have your own track record so HCM would need to create an appropriate management team to create the money management algo. A lot can go wrong.
Yes I see that. However one might ask where these profits are coming from and are they socially beneficial? I think many of the principals of these funds argue that they make markets more “efficient”. I’m not sure I buy the concept of market efficiency, nor do I think it’s a benefit which is worth allowing differential access to markets to facilitate. I think all investors should have access to the same information at the same time. Anything else is probably just to facilitate stealing.
I think in many cases algos are just stealing ordinary investors money and muttering some mumbo jumbo to justify it. The strongest argument I have seen for hft type algos is that they steal less than the previous bank/ broker style intermediaries.
Oh great.
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The funny thing being that during the 1930s J M Keynes looked after Cambridge University’s investments while Oxford employed a firm of stockbrokers. Guess which one succeeded and which failed?
It would be interesting to know why the internal workers “underperformed”.
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The most rational casino goers I ever came across were a couple who went to a casino every month with £250, which was their “entertainment budget”. They left when either they ran out of money or they doubled it. If they left in pocket, they spent the balance on going out somewhere else. A significant win might mean a box at Covent Garden or a weekend away. But their root assumption was that they were going to spend that £250.
Few investors are so rational.
Edit - some of the posts above should be read in conjunction with Fred Schwed’s But Where are all the Customers’ Yachts, which addresses everything but algorithmic trading per se, which did not exist at the time. I can honestly say this book has saved me many thousands of pounds.
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The Crimson article goes into some claims about why the fund underperformed compared to other university endowment funds: complacent and hidebound managers, dependence on siloed approach that focused too much on asset class and not enough on the overall fund as a whole. I also suspect that pressure from the current late-stage capitalist economic culture (defined in large part by HBS grads) played a part in the decision to give it all to outside hedge funds.
The way I look at it is that if you have more money to invest than you as a layman know what to do with then it makes some sense to find a trustworthy money manager (really a bookie) who spends his whole day paying attention to the markets. Most people, though, can just bung their market investment money into a portfolio of low- or no-fee index funds and leave it at that.
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