The Trader's Edge

Recently two of the most prominent hedge fund managers of our time closed up shop. Stanley Druckenmiller and Paolo Pellegrini decided to call it quits. Both were not having good years after long periods of market out performance.

In trying to understand why it is my belief that they had lost their "edge". That is not to imply that they are not excellent at what they do but it appears to me that over the past few years the rules of the game have changed. With the advent of quant funds that use super computers to execute trades at lightning speed there has been a massive spike in the volume of trades on all markets while the market capitalization of the S&P 500 has remained relatively flat for the same period (I looked at the last 10 years).

These funds have taken control of the markets and are running rampant at the expense of the "old school" investors. This is why there are days when ever hourly tick is a measured move higher with no draw downs. Only trades placed by computers with no rational thinking would continue to buy as prices increase only to offload all at once, as in the flash crash, when certain trigger points are hit.

The regulators have turned a blind eye to these trades as they make up the bulk of the stock exchange revenues, but it is my view that this is delaying another bad ending. Rather than being proactive and fixing the problem now the regulators are waiting until their gravy train is gone before supposedly helping the general public (after the public's portfolios have been decimated).

So what to do? Either you can close up shop as the managers above did or you can adapt to the "new" market order. As there has recently been a huge exodus from these funds mainly because the "safety" that they offered proved to be fleeting it is my opinion that the market is now on the verge of a very violent push lower. To take advantage of this, buy deep out of the money puts for ten to fifteen cents each and capture a huge windfall if my theories prove correct. If I am wrong you have only risked a small portion of your capital. While you wait for the market to implode read the book "The Black Swan" by Nassim Taleb.