“Generations of human beings were transformed into machines in the relentless pursuit of material wealth: We lived to work.” – Jeremy Rifkin, The Third Industrial Revolution
Founded in 1988 by former Columbia University computer science professor, David Shaw, above a bookstore in New York’s Union Square, The DE Shaw Group is now reported to manage over $50 billion in assets. LCH Investments ranks it as the fourth-highest grossing hedge fund group of all time; among the ranks of the likes of Soros, Bridgewater, and Citadel.
It is for reasons like these – and many others – that we have been eager to add comprehensive modeling of the available regulatory data for the main reporting entity, D. E. Shaw & Co., Inc., to our expanding library, and moreover, to our evolving understanding of the global market ecosystem.
And, like most – maybe all – of the legendary players, this one is worthy of a deeper case study. We will get there in time. For now, the following are a few highlights to fuel your ruminations about how the various market strategy sausages are being made – along with this reminder for why we are here as prelude:
Technology is among the most powerful drivers in markets today because it eventually removes the pre-existing illusion that a field of opportunity is infinite. And, those who successfully and persistently wield technology are eventually poised to harvest from that field of opportunity at unprecedented, industrialized scale. It is for this reason that Alphacution measures, models and otherwise seeks to solve relevant puzzles that might yield evidence as to the status and pace of this industrialization. With trillions of dollars worth of assets under management and billions of dollars worth of revenues at stake, one might guess that this could be valuable information to know…
As for the data about DE Shaw, we start by presenting the position count segmentation by legal entity for 81 of the total 94 quarters of 13F reporting beginning Q1 1999 and ending Q1 2019, below.
For the full period, there are 5 sub-entities that report positions under the umbrella entity, D. E. Shaw & Co., Inc. Clearly, “D. E. Shaw & Co., LP” is the primary entity wherein various quantitative US equity, convertible arbitrage (and other equity-linked), and derivatives trading units reside. D. E. Shaw Investment Management, LLC, which has grown consistently since 2005, is the only other entity of the 5 with a material position count.
When we look at overall position counts by product type, the picture takes on a different look. Within the confines of 13F reporting, this is mainly an equities shop, with an average of 67.5% of all positions over the full range of reporting based in cash equities. The sum of (long) call and put options positions, together averaging 25.6% of all positions over the full range of reporting, are the second most utilized product class (which is fascinating to see because not all quant shops trade options).
One of the most notable aspects of the previous illustration of product class segmentation is that you will find very few ETF positions. So, while some legendary firms, like Bridgewater, are managing massive positions in ETFs to expand capacity for quantitatively-based strategies, other – like D E Shaw – barely touch this increasingly popular product class.
Lastly, D E Shaw is known for rigorous risk management. One of the easiest (and illuminating) set of risk analytics to distill from 13F reporting are position concentrations. In the exhibit below, Alphacution presents the largest and top 10 largest positions (as a percentage of total position values) for the 81 quarters beginning Q1 1999 and ending Q1 2019.
Here – with the exception of the earliest periods when the portfolio and position counts were much smaller – DE Shaw displays remarkable consistency with regard to managing position concentrations. Typically, wild swings or persistent trajectories in these analytics might telegraph underlying shifts in strategy or perhaps second-guessing “swings-for-the-fences” when performance is not meeting expectations (or backtests). In this case, for the most part, we see the kind of discipline that one might expect of a legend…
Watch this space…
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