Tuesday, December 11, 2012

D.E. Shaw: "Common Sense in Managing and Measuring Leverage"

HT up front to Hedge Fund Letters who writes:
We just finished our profile of D.E.Shaw & Company. Today it is a multi-strategy investment powerhouse with over 1000 employees managing 26 billion dollars. It started, though, with an AUM of 28 million dollars in 1988 and the insights of the legendary “King Quant” Mr. D.E. Shaw himself. He was a pioneer who brought his clarity as a professor of Computer Science (along with hundreds of fellow PhDs) into the investment universe.

While Mr. Shaw he has taken a step back from the day to day operations of fund management (instead focusing on scientific studies), his indelible stamp continues to be in some of the Market Insights put out by DE Shaw & Co. We highlight this one from March 2010 entitled Lessons from the Woodshop: Common Sense in Managing and Measuring Leverage. (The reference to the Woodshop is in the context that most woodshop instructors are missing a digit or two thanks to using the table saw, just like using leverage can in many cases lead to visible losses.)

While the whole of Market Insight is, well, very insightful, especially in that it rescues the word leverage from having inherently negative connotations most recently acquired during the subprime financial crisis, we would like to highlight one particular section: “Risk-Reduction through Leverage? Yes, It Can Be Done!”...MORE
HFL has exhibited a nose for the good stuff.
From DocStoc:

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