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All investment funds are a charade. The probability that a firm like Bridgewater exists with higher than average returns is not zero. Nothing about Bridgewater

All investment funds are a charade. The probability that a firm like Bridgewater exists with higher than average returns is not zero. Nothing about Bridgewater would indicate that they somehow 'get it' whilst the other funds don't. It's strictly probability, or more accurately, it's strictly a bell-curve.

imaginenore 11y ago
Your conclusion is based on the assumption that the market is completely random and unpredictable. Which is demonstrably not true - high frequency trading, insider trading, general predictable events that affect the market.
- ImTalking 11y ago
  The market is random and unpredictable when it's random and unpredictable. And it's the opposite when it's the opposite. There will always be a small segment of traders who will do well. Doesn't mean that they are the Oracle of Delphi. It just means that, in a large enough sampling, the probability of those people existing is not zero. There is nothing in HFT that supports an argument of predictability unless you are another HFT possibly. Insider trading is a crime specifically because it removes the randomness of the market so I'm not sure why that's listed. And if there were, as you say, general predictable events then that does nothing to support the idea that Bridgewater has any special access to those.
  - melling 11y ago
    Dr James Simons says the market isn't random. https://en.m.wikipedia.org/wiki/James_Harris_Simons https://en.m.wikipedia.org/wiki/James_Harris_Simons https://www.ted.com/talks/jim_simons_a_rare_interview_with_the_mathematician_who_cracked_wall_street?language=en https://www.ted.com/talks/jim_simons_a_rare_interview_with_t... Now I'm not sure who to believe, some random guy on the Internet, or a mathematcian who has consistently beat the market.
    - quinnchr 11y ago
      And yet Mandelbrot thought the market was random. Now I'm not sure who to believe, one of the most important mathematicians in the last 50 years, or a dude who left the academic community to start a hedge fund.
      - bosma 11y ago
        Mandelbrot did not think the markets were random. He explicitly rejected the Efficient Market Hypothesis. http://www.amazon.com/Mis-behavior-Markets-Benoit-Mandelbrot/dp/0465043550 http://www.amazon.com/Mis-behavior-Markets-Benoit-Mandelbrot...
        quinnchr 11y ago
        Maybe I'm missing something, but how are randomness and the emh related? AFAIK random walk theory assumes the market is unpredictable and is consistent with the emh while other theories like the adaptive market hypothesis assume the opposite and are still consistent with emh.
        TheOtherHobbes 11y ago
        If the EMH were true, price curves would always display maximum entropy, i.e. randomness, because there would be no spare redundant information that could be used to make predictions about the future. (This is based on Shannon's Communications Theory, but the maximal entropy bound applies to any system that mixes a predictable signal with random noise.) It doesn't matter if you use an evolutionary explanation for price curves, as in AMH, or claim they're controlled by planetary alignments - because the prediction that price curves show maximum entropy is falsifiable regardless of possible causes. And when it's tested, it is indeed falsified. See e.g. http://www.turingfinance.com/hacking-the-random-walk-hypothesis/ http://www.turingfinance.com/hacking-the-random-walk-hypothe... tl;dr There are standard tools for estimating entropy, and they all agree that markets aren't truly random. Therefore they can't be maximally efficient. Quants make a living by mining the signal from the randomness. There's a lot of debate about the best way to do this, but there's no serious disagreement among quants that it's possible - and the people who make money by employing them tend to agree.
- deleted 11y ago
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Xcelerate 11y ago
I'm not sure why you got downvoted. Survivorship bias is a well-known phenomenon. I would be interested in distinguishing between hedge funds that do well because some "necessarily must" and those that actually have some kind of advantage with their algorithms. But how can you actually tell which is the case?
- ImTalking 11y ago
  I don't think you can. If on every trade you flip a coin, but intelligently limit your losses and ride your wins, you will beat every fund-manager on the planet. Nothing to do with smarts or algorithms. And even if you have good risk management, if you trade long enough, there will always be the perfect-storm 'meltdown' scenario. However, as I originally said, it's all probability and there will be a small group of managers who will never experience the meltdown (or the meltdown is waiting in their future).
  - mason55 11y ago
    > If on every trade you flip a coin, but intelligently limit your losses and ride your wins What does this mean? Sounds like gambler's fallacy combined with a Martingale system
    - ImTalking 11y ago
      Flip a coin... heads you go long, tails you go short. Limit your losses and ride the wins. You'll kill the market (until a perfect-storm meltdown event, of course). Nothing to do with Martingale.
      - shitgoose 11y ago
        Could you elaborate on "Limit your losses and ride the wins"? Do you assume that market is trending upwards (until meltdown)? Do you suppose to make money this way in flat market?
- bosma 11y ago
deleted 11y ago
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john_dough 11y ago
I would agree if you said that “most investment funds are a charade” or that most investment funds aren’t worth the fees they charge. Though I’d ask for a citation that Bridgewater (and other positive outliers) fall within statistical expectations, because I believe the data would show that there are many more positive outliers than you would get from pure chance [1]. Also, how much diligence have you done to conclude “Nothing about Bridgewater would indicate that they somehow 'get it' whilst the other funds don't”? Have you ever evaluated their knowledge, resources, and culture vs. the market? Do you not believe they have the culture described, or do you not believe it will result in better investment returns than the market? I imagine that you don’t read Bridgewater’s Daily Observations [2]. If you did, I think you would be quite impressed and would attribute at least some of their returns to skill. [1] Here are two references to a similar, but different, rebuttal: https://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-and-Doddsville https://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-a... http://www8.gsb.columbia.edu/alumni/news/superinvestors http://www8.gsb.columbia.edu/alumni/news/superinvestors [2] https://en.wikipedia.org/wiki/Bridgewater_Associates#Daily_Observations https://en.wikipedia.org/wiki/Bridgewater_Associates#Daily_O... Here is an example of some of their economic publishing http://www.bwater.com/Uploads/FileManager/research/how-the-economic-machine-works/ray_dalio__how_the_economic_machine_works__leveragings_and_deleveragings.pdf http://www.bwater.com/Uploads/FileManager/research/how-the-e...

imaginenore 11y ago

Your conclusion is based on the assumption that the market is completely random and unpredictable. Which is demonstrably not true - high frequency trading, insider trading, general predictable events that affect the market.

ImTalking 11y ago
The market is random and unpredictable when it's random and unpredictable. And it's the opposite when it's the opposite. There will always be a small segment of traders who will do well. Doesn't mean that they are the Oracle of Delphi. It just means that, in a large enough sampling, the probability of those people existing is not zero. There is nothing in HFT that supports an argument of predictability unless you are another HFT possibly. Insider trading is a crime specifically because it removes the randomness of the market so I'm not sure why that's listed. And if there were, as you say, general predictable events then that does nothing to support the idea that Bridgewater has any special access to those.
- melling 11y ago
  Dr James Simons says the market isn't random. https://en.m.wikipedia.org/wiki/James_Harris_Simons https://en.m.wikipedia.org/wiki/James_Harris_Simons https://www.ted.com/talks/jim_simons_a_rare_interview_with_the_mathematician_who_cracked_wall_street?language=en https://www.ted.com/talks/jim_simons_a_rare_interview_with_t... Now I'm not sure who to believe, some random guy on the Internet, or a mathematcian who has consistently beat the market.
  - quinnchr 11y ago
    And yet Mandelbrot thought the market was random. Now I'm not sure who to believe, one of the most important mathematicians in the last 50 years, or a dude who left the academic community to start a hedge fund.
    - bosma 11y ago
      Mandelbrot did not think the markets were random. He explicitly rejected the Efficient Market Hypothesis. http://www.amazon.com/Mis-behavior-Markets-Benoit-Mandelbrot/dp/0465043550 http://www.amazon.com/Mis-behavior-Markets-Benoit-Mandelbrot...
      - quinnchr 11y ago
        Maybe I'm missing something, but how are randomness and the emh related? AFAIK random walk theory assumes the market is unpredictable and is consistent with the emh while other theories like the adaptive market hypothesis assume the opposite and are still consistent with emh.
        TheOtherHobbes 11y ago
        If the EMH were true, price curves would always display maximum entropy, i.e. randomness, because there would be no spare redundant information that could be used to make predictions about the future. (This is based on Shannon's Communications Theory, but the maximal entropy bound applies to any system that mixes a predictable signal with random noise.) It doesn't matter if you use an evolutionary explanation for price curves, as in AMH, or claim they're controlled by planetary alignments - because the prediction that price curves show maximum entropy is falsifiable regardless of possible causes. And when it's tested, it is indeed falsified. See e.g. http://www.turingfinance.com/hacking-the-random-walk-hypothesis/ http://www.turingfinance.com/hacking-the-random-walk-hypothe... tl;dr There are standard tools for estimating entropy, and they all agree that markets aren't truly random. Therefore they can't be maximally efficient. Quants make a living by mining the signal from the randomness. There's a lot of debate about the best way to do this, but there's no serious disagreement among quants that it's possible - and the people who make money by employing them tend to agree.
deleted 11y ago
[deleted]

Xcelerate 11y ago

I'm not sure why you got downvoted. Survivorship bias is a well-known phenomenon. I would be interested in distinguishing between hedge funds that do well because some "necessarily must" and those that actually have some kind of advantage with their algorithms. But how can you actually tell which is the case?

ImTalking 11y ago
I don't think you can. If on every trade you flip a coin, but intelligently limit your losses and ride your wins, you will beat every fund-manager on the planet. Nothing to do with smarts or algorithms. And even if you have good risk management, if you trade long enough, there will always be the perfect-storm 'meltdown' scenario. However, as I originally said, it's all probability and there will be a small group of managers who will never experience the meltdown (or the meltdown is waiting in their future).
- mason55 11y ago
  > If on every trade you flip a coin, but intelligently limit your losses and ride your wins What does this mean? Sounds like gambler's fallacy combined with a Martingale system
  - ImTalking 11y ago
    Flip a coin... heads you go long, tails you go short. Limit your losses and ride the wins. You'll kill the market (until a perfect-storm meltdown event, of course). Nothing to do with Martingale.
    - shitgoose 11y ago
      Could you elaborate on "Limit your losses and ride the wins"? Do you assume that market is trending upwards (until meltdown)? Do you suppose to make money this way in flat market?
bosma 11y ago

deleted 11y ago

[deleted]

john_dough 11y ago

I would agree if you said that “most investment funds are a charade” or that most investment funds aren’t worth the fees they charge. Though I’d ask for a citation that Bridgewater (and other positive outliers) fall within statistical expectations, because I believe the data would show that there are many more positive outliers than you would get from pure chance [1]. Also, how much diligence have you done to conclude “Nothing about Bridgewater would indicate that they somehow 'get it' whilst the other funds don't”? Have you ever evaluated their knowledge, resources, and culture vs. the market? Do you not believe they have the culture described, or do you not believe it will result in better investment returns than the market? I imagine that you don’t read Bridgewater’s Daily Observations [2]. If you did, I think you would be quite impressed and would attribute at least some of their returns to skill. [1] Here are two references to a similar, but different, rebuttal: https://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-and-Doddsville https://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-a... http://www8.gsb.columbia.edu/alumni/news/superinvestors http://www8.gsb.columbia.edu/alumni/news/superinvestors [2] https://en.wikipedia.org/wiki/Bridgewater_Associates#Daily_Observations https://en.wikipedia.org/wiki/Bridgewater_Associates#Daily_O... Here is an example of some of their economic publishing http://www.bwater.com/Uploads/FileManager/research/how-the-economic-machine-works/ray_dalio__how_the_economic_machine_works__leveragings_and_deleveragings.pdf http://www.bwater.com/Uploads/FileManager/research/how-the-e...