Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
When Investors Expect To Get Paid For Activity... - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  
The Equitymaster Research Digest

When Investors Expect To Get Paid For Activity...
Sep 13, 2016

  • The lure of a billion-dollar IPO
  • Cues of Sensex 40,000 this earning season
  • BHEL's 15% rise and Yes Bank's 15% fall

Let's start the Digest today with the story of DE Shaw & Co.

Founded in 1988, Shaw was staffed by some of the brightest mathematicians, computer scientists, and bond trading experts on the planet. Jeff Bezos worked at Shaw before embarking on his Amazon.com journey. The firm had figured out that there was a lot of money to be made from risk-free arbitrage in the bond markets. Especially with some highly sophisticated bond arbitrage trading algorithms.

And so with highly leveraged capital, Shaw was able to capitalise on minuscule short-term inefficiencies in the bond markets. The annualised returns were nothing short of spectacular - and all of it risk-free!

The bright folks at Shaw put their trading on autopilot - only minimal human tweaking required. As per reports, they came to work and mostly played pool or video games. Shaw's profit per employee was astronomical. And for a while everyone was happy with this utopian arrangement.

But eventually, the nerds got fidgety - they wanted to do something. They felt they had only scratched the surface. If they only dug deeper, there would be more gold to be mined. And so they fiddled with the system to try to juice returns.

What followed was a fate similar to that of Long-Term Capital Management (LTCM). LTCM was a Wall Street fund once considered so big and so smart that it simply could not fail. And yet, when economic events that did not conform to its historical model took place in rapid succession, it nearly did just that. The firm gradually moved from pure risk-free arbitrage to playing the risky arbitrage game in the equity markets. A lot more capital could be deployed, and the returns looked appealing. But when disaster struck, with highly leveraged positions, the fallout nearly destroyed them.

To Read the Full Story, Subscribe or Sign In

Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms