Scientists starting hedge funds isn't a new phenomenon. I forget the name (kinda telling) but it was an all star team of physicists and nobel prize winners doing some triangular arbitrage (?) and then blowing up spectacularly. Apart from HFT, lot of quant or algorithm based funds never seems to last longer than the market will let them. You see successful money managers but rarely are they quant based strategists. It never made sense as to why you would need so much science in a field where investing and trading is an art half of the time. I might not be understand how quants typically work which adds to my biased thinking but we've seen many like this. Reminds me of what Warren Buffet said "It is better to be approximately right than precisely wrong."
By art you mean inside information, or who has the money--connections to get light sentences when caught--unless the government wants to really send a message? "Take it easy guys! There's not enough SEC employees to catch you, but don't be a blatant fool. Do your insider trading like your daddy did, at social functions--inconspicuously?
(Actually--I know what you're getting at. My luck in the stock market is usually so wrong, I just just decided to become a contrarian investor--when I have the money to gamble.)
Their is some science in HFT, and diversification!
I feel the next big scandal in the market will be the viewing of dataa--search engines have on on financial traders?
)They map every IP address. They know what what investment houses are searching for! I don't think I could not look at that data, and place my order?)
Janet--raise those rates. They are hurting the poor and middle class. I'm tired of no interest on my cd. I'm tired of bank fees.(those bastards will proabbly still change fees when interest rates increase?). I love the health care Obama, but this free money is only helping the 1 percent. You have helped them enough, and it's not trickling down?
I wanted to put my last few thousand on PayPal. I this it will go up. I might check it out tomorrow? (I think it will go up because of name recognition? Not becuse it's better than anyone else?). "I need to send money grandson, should I use PayPal, like I did years ago! Yes--grandma!).
I understand your skepticism but see no value in it. Throwing up your arms and saying it can't be done doesn't seem like an intelligent way to look at the problem when you consider that someone else has already shown you that it can be done.
David Shaw is a hero to all scientists that hate writing grants. The best part is that once he was done terrorizing Wall Street for 20 years, he went back to research in protein folding.
Now there is a role model for you.
Disclosure: DE Shaw paid for some of my research long ago.
What continues to amaze me is that there does not seem to be any convincing scientific evidence that predictive patterns can be found in past price movements, and yet many reputable investment firms are throwing a lot of money at this problem.
I understand that not all quantitative approaches depend on finding patterns in past prices, but some do.
I am completely undecided on this one. It baffles me. It's not like every company applying materials science also experiments with witchcraft somewhere in the basement, so what's going on here?
There are predictive short term patterns, but once the knowledge of the patterns spreads, they start to disappear. There is also constant change in long term patterns because the world outside financial market changes unexpected ways.
Financial markets are self reflecting system where people who invest are inside the the system and change it.
If you discover pattern that makes money, you must keep it secret and establish firm that tries to exploit it. If you are successful, others notice it and start to analyze your game and the edge starts to disappear. You may use machine learning to discover constantly new patterns but that does not change the situation, because others also use machine learning to detect new patterns.
Portfolio managers seeking high alpha are often poker players, because Poker and alpha seeking are very similar games.
But banks also employ technical analysts who use well known technical signals like support and resistance. Your and lumberjack's theory does not apply to them and yet they get paid.
No they don't. Technical analysis is to professional trading what astrology is to astronomy and big banks don't use them. Those books are snake oil sold to hobbyists and small time traders.
Large banks, investment management firms use completely different statistical methods.
Publicity doesn't bring much benefit to quant funds, and it can attract imitators, so you are much more likely to have heard of a successful fundamental manager than a quant manager. The article is about a guy coming from Renaissance, which is probably the most successful hedge fund in history.
because almost all the funds are doing business using money from other people. having highly sophisticated formula, models,algorithms and Ph.D from top universities is intimidatingly convincing to investors to put money in.
on the other hand, investors, most being institutional, who are hardly convinced either, nevertheless would invest. after all, it's not their money. they just need some justification.
it's business, rather than arts or science.
it reminds me of Madoff. Technically, it was a quant fund in a sense that he paid his engineers to create algorithms to falsify returns. Nobody would've known it was a scam all along apart from contrarians who immediately called bullshit on his consistent double digit returns, even through bubble busts when he is typically long.
It appears that raising money either for hedge funds or startups doesn't seem to be rooted in rationalism and caution, rather money seems to flow to those that acquire the social credits which can come in the form of academic credentials, bro-ism, and being 'a lucky sperm' for a lack of better word.
Comments
Scientists starting hedge funds isn't a new phenomenon. I forget the name (kinda telling) but it was an all star team of physicists and nobel prize winners doing some triangular arbitrage (?) and then blowing up spectacularly. Apart from HFT, lot of quant or algorithm based funds never seems to last longer than the market will let them. You see successful money managers but rarely are they quant based strategists. It never made sense as to why you would need so much science in a field where investing and trading is an art half of the time. I might not be understand how quants typically work which adds to my biased thinking but we've seen many like this. Reminds me of what Warren Buffet said "It is better to be approximately right than precisely wrong."
I think that you are referring to LTCM ( https://en.wikipedia.org/wiki/Long-Term_Capital_Management ) which blew up in the late 90s. For others interested, I would strongly recommend the book "When Genius Failed" ( http://www.amazon.com/dp/0375758259 )
It never made sense as to why you would need so much science in a field where investing and trading is an art half of the time.
There are many people who believe arts are just sciences we haven't worked out the rules for yet.
By art you mean inside information, or who has the money--connections to get light sentences when caught--unless the government wants to really send a message? "Take it easy guys! There's not enough SEC employees to catch you, but don't be a blatant fool. Do your insider trading like your daddy did, at social functions--inconspicuously?
(Actually--I know what you're getting at. My luck in the stock market is usually so wrong, I just just decided to become a contrarian investor--when I have the money to gamble.)
Their is some science in HFT, and diversification!
I feel the next big scandal in the market will be the viewing of dataa--search engines have on on financial traders? )They map every IP address. They know what what investment houses are searching for! I don't think I could not look at that data, and place my order?)
Janet--raise those rates. They are hurting the poor and middle class. I'm tired of no interest on my cd. I'm tired of bank fees.(those bastards will proabbly still change fees when interest rates increase?). I love the health care Obama, but this free money is only helping the 1 percent. You have helped them enough, and it's not trickling down?
I wanted to put my last few thousand on PayPal. I this it will go up. I might check it out tomorrow? (I think it will go up because of name recognition? Not becuse it's better than anyone else?). "I need to send money grandson, should I use PayPal, like I did years ago! Yes--grandma!).
It never made sense as to why you would need so much science in a field where investing and trading is dumb luck half of the time.
it never made sense to me why you need human being making investment decisions, when there exist perfectly good algorithms for doing the same thing
Isn't DE Shaw quant based? He started almost 30 years ago in 1987.
https://en.m.wikipedia.org/wiki/David_E._Shaw
https://en.m.wikipedia.org/wiki/D._E._Shaw_%26_Co.
I understand your skepticism but see no value in it. Throwing up your arms and saying it can't be done doesn't seem like an intelligent way to look at the problem when you consider that someone else has already shown you that it can be done.
David Shaw is a hero to all scientists that hate writing grants. The best part is that once he was done terrorizing Wall Street for 20 years, he went back to research in protein folding.
Now there is a role model for you.
Disclosure: DE Shaw paid for some of my research long ago.
This company? https://www.deshawresearch.com
It looks quite large. What are the goals of their research?
What continues to amaze me is that there does not seem to be any convincing scientific evidence that predictive patterns can be found in past price movements, and yet many reputable investment firms are throwing a lot of money at this problem.
I understand that not all quantitative approaches depend on finding patterns in past prices, but some do.
I am completely undecided on this one. It baffles me. It's not like every company applying materials science also experiments with witchcraft somewhere in the basement, so what's going on here?
There are predictive short term patterns, but once the knowledge of the patterns spreads, they start to disappear. There is also constant change in long term patterns because the world outside financial market changes unexpected ways.
Financial markets are self reflecting system where people who invest are inside the the system and change it.
If you discover pattern that makes money, you must keep it secret and establish firm that tries to exploit it. If you are successful, others notice it and start to analyze your game and the edge starts to disappear. You may use machine learning to discover constantly new patterns but that does not change the situation, because others also use machine learning to detect new patterns.
Portfolio managers seeking high alpha are often poker players, because Poker and alpha seeking are very similar games.
But banks also employ technical analysts who use well known technical signals like support and resistance. Your and lumberjack's theory does not apply to them and yet they get paid.
No they don't. Technical analysis is to professional trading what astrology is to astronomy and big banks don't use them. Those books are snake oil sold to hobbyists and small time traders.
Large banks, investment management firms use completely different statistical methods.
It's because if you do believe you have found such evidence, you don't publish it. You start a hedge fund.
Publicity doesn't bring much benefit to quant funds, and it can attract imitators, so you are much more likely to have heard of a successful fundamental manager than a quant manager. The article is about a guy coming from Renaissance, which is probably the most successful hedge fund in history.
because almost all the funds are doing business using money from other people. having highly sophisticated formula, models,algorithms and Ph.D from top universities is intimidatingly convincing to investors to put money in. on the other hand, investors, most being institutional, who are hardly convinced either, nevertheless would invest. after all, it's not their money. they just need some justification. it's business, rather than arts or science.
it reminds me of Madoff. Technically, it was a quant fund in a sense that he paid his engineers to create algorithms to falsify returns. Nobody would've known it was a scam all along apart from contrarians who immediately called bullshit on his consistent double digit returns, even through bubble busts when he is typically long.
It appears that raising money either for hedge funds or startups doesn't seem to be rooted in rationalism and caution, rather money seems to flow to those that acquire the social credits which can come in the form of academic credentials, bro-ism, and being 'a lucky sperm' for a lack of better word.