[Tams]

Originally Posted by dangermouseb »

Following on from "The Question of Randomness" thread. How do people know the markets aren't random? I'm up for creating some random data to see if someone can show me how they know it's random or not - just for fun... DM

the market is a reflection of human activities (buying and selling).

if you think people buying and selling based on random decisions,
then the market will be random.

[Adrian]

People act in ways that are anything but random. That is why a huge disproportion of daily highs or lows are created on the open. Emotion rules.

[MightyMouse]

Originally Posted by Adrian »

??? LOL You just contradicted yourself MM. When did I say we should plot selective hedge fund returns of those who were only long gold? That is the silliest thing I have ever heard, And even more absurd is your attempt to suggest that that was what I was suggesting. Then you go on to effectively agree with me by saying the results are only meaningful if you plot all hedge fund returns. I think you have lost the plot. The only reason I gave the simplistic hedge fund exmaple is to make it easy for readers to relate rather than going into some high level quant discussion which is a bit beyond me anyway. Read Edgar Peters book as a start. It seems though that even dumbing things down isn't enough.

You are right it is silly. That was the point. If you plot all hedge fund returns you will not come up with the results that you came up with as some sort of support of markets being non random. If you didn't do the research yourself then you are simply passing along misinformation.

On balance hedge funds do not out perform markets. Cabese?

[Adrian]

@MM I never pass along misinformation as you call it. But happy to let you drift along with flawed knowledge of the facts. It took me 5 seconds to find this URL:

Hedge Funds: Higher Returns Or Just High Fees?

Outcome? Hedge Fund returns 1994-2009 8.93% vs SP500 6.46%
Volatility? Hedge Funds 8% versus SP500 15.5%.

Of course numbers vary widely within that time frame, and individual funds vary even more, but as a whole, over a fair amount of time, the outcome is as expected. Even if we adjust for those funds which dropped out of the index, hedge funds generate a quantum better risk adjusted return. If you wish to continue to to hold your view so your ego and belief system are maintained, feel free to do so. Know though that ultimately only you will be the one to suffer.

[SIUYA]

Random question of the day - why is it many people will involve themselves in a discussion - get all heated up and distracted from the original question and yet at the same time not provide a working definition for which the discussion can revolve around.?


How do I know the markets aren't random?

I dont - but I dont care ....either way.
I assume they are not random (as I dont believe that each and every subsequent price point is independent from those that have preceded it. So it is not a casino)

All I need to know is how can I profit out of the market fluctuations regardless of whether those fluctuations are random or not.

[Adrian]

@SIUYA The answer to your question is because we are human, and humans are fundamentally flawed emotional creatures. Creatures that have egos and belief systems that they feel they need to protect, even if they know they are wrong and have been proven so. Most people's belief systems are wrong in so many different ways, but if you attempt to question them on it they will become defensive or simply run away. I have observed this for decades. I would suggest that less than 1 in a 100 people are capable of questioning their own belief systems, and changing it if they discover they are wrong. Most people think they are open minded, but they aren't. So this is why a topic can so easily head off in a tangent for all the wrong reasons.

Actually you should care if the markets are random or not. If they were truly random, no method would ever be able to make money consistently, and you definitely would not have a chance of reliably achieving good risk adjusted returns, which ultimately should be the goal of every trader/investor. It would be like playing routlette with 18 black and 18 red numbers only. There is no mathematical way to make money in such a situation.

Since we do thankfully know that markets aren't random, we can say that is is possible to make money over time.

[MightyMouse]

Originally Posted by Adrian »

@MM I never pass along misinformation as you call it. But happy to let you drift along with flawed knowledge of the facts. It took me 5 seconds to find this URL:

Hedge Funds: Higher Returns Or Just High Fees?

Outcome? Hedge Fund returns 1994-2009 8.93% vs SP500 6.46%
Volatility? Hedge Funds 8% versus SP500 15.5%.

Of course numbers vary widely within that time frame, and individual funds vary even more, but as a whole, over a fair amount of time, the outcome is as expected. Even if we adjust for those funds which dropped out of the index, hedge funds generate a quantum better risk adjusted return. If you wish to continue to to hold your view so your ego and belief system are maintained, feel free to do so. Know though that ultimately only you will be the one to suffer.

You are comparing apples to oranges to support your thinking. You need to look at the funds that traded the S&P to compare the hedge fund returns to the S&P. If on balance all hedge funds outperformed the S&P with lower volatility, then you would have something. Otherwise, what you are describing is completely meaningless and is also subject to survival bias.

This is taken from your article:

"A timely strategy is also critical. The often-cited statistics from CSFB/Tremont Index in regard to hedge fund performance during the 1990s are revealing. From January 1994 to September 2000 - a raging bull market by any definition - the passive S&P 500 Index outperformed every major hedge fund strategy by a whopping 6% in annualized return.

Read more: http://www.investopedia.com/articles/03/121003.asp#ixzz1ezgZ5VHU"

[Adrian]

@MM You seem to be trying to pretend to talk high level, but all your comments are contradictory, wrong, and simply confusing and distorting for other readers of this thread. The comments add nothing, and just ceate confusion. You need to gather your thoughts and express yourself more clearly, as your interpreations of what I write are just amazingly bad an erroneous.

Of course I am comparing apples to oranges. Hedge funds aren't replicating the S&P500 index. Hedge Funds trade all sorts of things. People invest in them as a diversification away from long equity only investments. And in some cases people invest in them exclusively because of their tight risk controls (in the better managed ones anyway) and their return/risk characteristics. So your completely wrong to say I need to compare hedge funds that only trade the S&P. Our goal is to establish if markets are random or not and can hedge fund mangers out perform our main investment vehicle of long equities. Clearly they do. End of story. Only a fool looking to create an argument would suggest otherwise. Of course you can also do as you suggest and just look at those hedge funds tha tonly trade equities. That would not be a flawed approach bby any means.

Then you go on to state that if ALL hedge funds outperformed with lower volatility I would have something LOL. Are you kidding? I'm sure I am misinterpretating your statement as only an idiot would ever expect every hedge fund to outperform on a risk adjusted basis. And if you bothered to read my commentary properly you will se eI made mention of survivorship bias. Why I waste my time replying to these comments from people who pretend to know what they are saying, but clearly don't is beyond me. You know it is not a bad thing to adm it ignorance on something. A person will gain a great deal more respect than someone who pretends to know. In fact the latter type, get zero respect from me.

And lastly, you quote a passge from the URL article I gave.. Why did you quote it? I am sure you are trying to prove you are right and I am wrong LOL. If you believe that showing hedge funds underpeformed in a massive equity bull market proves that hedge funds cannot outperform and therefore markets are random, you truly are an insecure fool, desparate for attention to cover up your own poor trading record. When a market, any market, goes into a massive bull trend, then is no strategy (assuming no leverage) that can outperform a buy and hold for the length of the bull trend. These are generally rare events though, that by definition do not last. It is hilariously fascinating that you put the quote in but never commented on it.

Backk to you MM. Pelase write a new reply that shows you don't understand what you are saying. Amuse the followers of this thread. SIUYA will be laughing as well, as you attempt to look for every excuse under the sun to prove that the factual research out there is all wrong and you are the only one who is right. LOL secretly though, we both know you agree with what I right, and that markets aren't random, and that enables the better investment managers (whatever their specialist area) to regularly generate excellent risk adjust returns. If you don't believe in this, put your money in a range of funds that have underperformed for at least 5 years, and share with us which ones you chose, as you wil now tell us that these funds should return towards a mean return of zero. Of course even if markets were random, that logic would be wrong as well, as the law of large numbers takes hold. But that is another disscusiion altogether that has no relevance here.