“Even though the transformation of energy, in all of its various forms, is the very basis of all economic activity, only a tiny fraction of economists have even studied thermodynamics. And only a handful of individuals inside the profession have attempted to redefine economic theory and practice based on the energy laws.” – Jeremy Rifkin, The Third Industrial Revolution
With this Feed post, Alphacution adds Balyasny Asset Management, LLC (BAM) to its growing roster of modelled trading firms. BAM is a multi-strategy multi-manager investment firm who is often compared to the likes of Millennium, Point72, and Citadel. We might go a bit further to add Two Sigma and AQR Capital Management to a broader description of other large hedge fund managers that operate in the active management zone of our ecosystem map.
To more specifically define BAM’s core strategy genre as statistical arbitrage is likely to go a bit too far on the active and automated strategy spectrum, as its material reliance on fundamental analysis would more accurately put it among the leading “quantamental” shops. And yet, based on our initial modeling, BAM is likely to employ a material quantitative overlay for portfolio optimization and risk management that seeks to balance exposures to market factors (thereby buffering the portfolio against unexpected market shocks).
Now, since we have invested so much of our own energy modeling the structural alpha and active management zones of our ecosystem map – particularly given the modeling of Two Sigma, Millennium, D. E. Shaw, and Renaissance – I thought it would be instructive with this one to give our readers something extra to ponder.
In the Exhibit below, Alphacution presents BAM’s track record of 13F gross notional long market value (GNLMV) disclosures for the 60 quarters beginning Q4 2002 and ending Q3 2017, plus various projections for the remaining 8-quarter period through to the most recent disclosures for Q3 2019.
Given what you may or may not know about BAM – and in the context of the community of players mentioned above plus the recent evolution of market macrostructure – how would you place the odds of the up, flat or down scenarios in the chart above?
The lesson here is that most managers – and frankly, most people – operate with an overly narrow lens relative to the wide lens perspective offered by the available data. Due to the inherent proprietary nature of market strategy development and scaling, hedge fund managers and prop firms and others, travel the landscape as if by the stealth of a submarine; not paying much attention to who may be “nearby.”
Granted, there has never been a historical reason to use “echolocation” to determine if others were tracking your very same source of alpha. This is particularly true while a manager or trading firm is still small (because persistent alpha can be easily confused with accidental or temporary alpha). However, as a manager scales, the source of alpha must be more reliably persistent. The two go hand in hand. And, with that scaling on the back of persistent sources of alpha, managers need to care much more about who is swimming in those very same waters…
Recent history is providing a growing body of evidence that strategy development and scaling should not happen in a vacuum. More than ever before, the capacity boundaries of many of the most coveted quant strategies are beginning to come into question, and therefore, even market leaders need to pay closer attention to who else may be siphoning from their source(s) of alpha…
One more thing: To be clear, the title image is not intended to suggest that BAM is playing the role of the smaller or bigger submarine, metaphorically speaking. Chances are, they play both roles simultaneously. The larger point, however, is that the competitive dynamics around persistent sources of alpha have never been more fierce. When we present the picture of all the so-called “submarines” that are operating in the same (shrinking) body of water – which we will eventually do – they will realize that the cost of continued success and scaling continues to increase in order to remain the hunter and not succumb to becoming the prey.
Until next time…