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7/14/2005
Clay-Court Tennis and Markets, by Victor Niederhoffer

Winners of the French Open (played on clay) are far different in ranking and style from those who win hard court and grass tournaments. The reason is that the balance between risk and reward is different. On clay, a player can't afford to go for outright winners, because every ball can be returned. Often, three or four good shots are necessary to win a point, versus one good shot on grass.

At a recent Wimbledon tournament, the finals never went beyond three strokes in a point on one side, versus 20 or 25 in a normal good French Open match. Thus a stroke which has only a 40% error rate would have a 22% chance of winning a point on clay, versus a 60% chance on grass. Moreover, a much higher arc over the net with much greater topspin and a much smaller chance of double faulting is necessary on clay versus grass.

Specinvesting seems to require similar changes in style. For a given market, going for a high-risk, high-return trade is appropriate after certain events, e.g., after a period of high volatility, or great swinging. For differences between markets, similar variations in the game might be played.

In retrospect, the currency and grain and metal markets seem to favor a higher risk strategy versus those with a long-term upward drift. Tactics appropriate for grass would seem to apply more to growth stocks, and tactics appropriate to clay would seem to apply more to value stocks. Around holidays and in other reduced trading volume environments such as those that often exist in the summer, a grass court strategy would apply.

All such seemingly sensible ideas of course must be tested and varied based on the Baconian theories.

James Humbert adds:

The effort of hitting a high-arching topspin ball on a clay court is immense and it isn't for glamour. It is intended so that the ball, after the bounce, goes higher and travels deeper to the back of the court. This creates some problems for the opponent. It will generally back the opponent close to or behind the baseline, making his position less offensive, and returning higher bouncing balls is generally more difficult, thus causing more unforced errors. I wouldn't care if I had to do a handstand and use my legs on the racquet if that meant I could back my opponent off of the court and put me into better position to win points.

The current problem with navigating the markets profitably is that traditional mixes of topspin and slice are not working. The prime money management law, risk/reward ratio, is being followed by every single player these days. "If you're looking to make 50 basis points, use 15-20 as your stop," is the common adaptation. Only in uncrowded instruments does this law to work consistently. Everything else is binary. You have to be willing to take on above-average drawdown for a symmetric, profitable return. And that drives the crowd in the tennis stadium, and your manager/coach, completely crazy.

Jonathan Hillman writes:

For a given market, going for a high risk, high return trade is appropriate after certain events, e.g. after a period of high volatility, or great swinging. For differences between markets, similar variations in the game might be played. In retrospect the currencies and grain and metal markets seem to favor a higher risk strategy versus those with a long term upward drift. Tactics appropriate for grass would seem to apply more to growth stocks and tactics appropriate to clay would seem to apply more to value stocks.  Around holidays, and in reduced trading volume environments such as those that often exist in the summer, a grass court strategy would apply."

This analogy reminds me of EdSpec 152-153 on open and closed positions, an inspirational passage on board games and the Palindrome's use of leverage, somewhat dissonant at points with the advice above. An apparent irony is that the fellow who more or less invented the game that works so well on grass, Jack Kramer, said of clay that it is the fairest surface. Why?  The player with the best strokes eventually wins. The apparent irony dissipates when one realizes that overcoming the tendency to calcify is the only rational response to a protean world.  Sometimes doing the same thing and expecting the same result is no less insane than expecting a different one!

James Humbert replies:

A serious tennis player doesn't vary his mental and physical effort from stroke to stroke.  Although a slice backhand looks like an easier stroke, the skilled, demanding players will put forth the same effort as they would a forehand taken on the rise.

Position sizing is not analogous to this maxim of stroke production in tennis. Tennis is played one stroke at a time, while portfolio management and trading requires making several strokes at once. Because I have been flying the friendly skies with maximum effort the last 7-8 days, I could not possibly put the same effort into other strokes. Believe me, if I had more arms, you can bet that I would be maxed up in every other stroke in my game. There is no sense in doing anything less.

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