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But that's the problem. Bonuses are awarded based on who can argue politically. It's similar to creating Dutch books. Managers will work hard to set a up a situ

by p4wnc6 10y ago

But that's the problem. Bonuses are awarded based on who can argue politically. It's similar to creating Dutch books. Managers will work hard to set a up a situation such that, no matter what the actual performance outcome really is, they have ready-made, plausible-seeming arguments for why it wasn't their fault and why they did what was asked and it was impossible to avoid the particular outcome. Then they push the burden of blame for a failed outcome somewhere down the hierarchy. It's not a perfect science, and yes, sometimes managers do get dinged badly for failing to be objective enough, but most often even what that does happen the incentive scheme doesn't cause them to become more open-minded with regard to modeling techniques, rather more cynical and aggressive with political techniques. I thought the exact same thing going into finance. If real money is on the line, surely they care about which techniques are most rigorously justified in a given model context, right? Absolutely not. The incentive schemes from clients (who often don't actually fire bad investment managers when they should, and who also engage in chasing returns momentum despite the long and, by now, boring and uncontroversial history of that not paying off) don't actually punish inefficiency. It's a big political mess. Really the best you can hope for is that they'll hire you for marketing purposes. Hey look, we brought in a shiny new expert in deep learning -- we're cutting edge, we swear! They won't actually let you do any real work with deep learning, of course. It will all be Excel jockey bullshit on factor models in which you'll do obviously fallacious things like directly compare the t-stats of two different model fits as a means for model selection. Maybe you'll write an ineffectual white paper on something slightly more advanced from time to time. But the big reason you're hired is to look good on paper and smoke cigars and drink brandy with the right person who wants you as a political darling in order to win arguments from authority about how you definitely should not migrate away from Excel/VBA. This is not hyperbole, sadly.

mathattack 10y ago
For hedge funds, doesn't it still ultimately come to the bottom line? My experience with traders and hedge fund quantis is ultimately they get paid a % on revenue or gains - for junior people it's more political, but the more senior they get the more it's correlated. This doesn't count sell side marketing work, or slow money (insurance, mutual fund) buy side work where people get paid for Assets Under Management versus a % of the gains.
- p4wnc6 10y ago
  Not really. Some hedge funds might be somewhat better, but there are many kinds of hedge funds. A large number of them function in almost precisely the same manner as a traditional asset manager, and are compensated and incentivized in the same way. As a non-manager employee at these firms, your bonus is still usually expressed as a percentage of your base salary with the caveat that it is awarded in a discretionary way that is based on firm performance, but is not given by any explicit formula connected to profits or losses. Some firms also don't even bother to give any details whatsoever, and the job offer will simply say there is a discretionary bonus, no percentage, no description at all. I actually turned down a hedge fund job because of this. I told them that in order for me to feel comfortable accepting an entirely discretionary bonus, with no baseline or agreed upon way of relating it to base salary or profits and losses, I would need a much higher base salary, and they weren't willing to negotiate about it. The number of firms, even among extremely quant-heavy hedge funds, who award bonuses in a manner that is not overwhelmingly political is exceedingly tiny. What this means is that the same political incentives affect even most hedge funds, and so they care far less about the mathematical rigor of what they are doing than about how to sell political stories about it. If "interpretability" sells political stories, then that's what they'll do. Where are the hedge funds using sophisticated statistics? Maybe Renaissance. Maybe. Where else? Certainly not DE Shaw. Certainly not PDT. Certainly not G-Research. Certainly not Coatue. And on and on. When you interview at these places, and see how the sausage is made, it is eye-opening and alarming to understand just how little their business utilizes or cares about mathematics, statistical rigor, and often not even proper software design. They are just more of the same kinds of shoddy software shops cranking out ad hoc code for rapidly varying political whims, but with far better branding.
  - jxramos 10y ago
    All this discussion makes me think about that bet Warren Buffet issued some years back about dumb index vs managed hedge fund. Political authority is an interesting slant to all this. Makes me also think about Thomas Sowells "varieties of nothing", ie putting on a show to make it look like someone is doing something when their net contribution is near nil. http://www.npr.org/2016/03/10/469897691/armed-with-an-index-fund-warren-buffett-is-on-track-to-win-hedge-fund-bet http://www.npr.org/2016/03/10/469897691/armed-with-an-index-...
ACow_Adonis 10y ago
I work for a large-ish bank. Sadly can confirm everything this guy says is completely accurate. I'm trying to get out...
selectron 10y ago
Interesting. After watching the show Billions, and reading up on how much money hedge fund managers make on fees (seems totally ridiculous), I wonder how common is illegal insider trading for hedge funds? No matter how good your model is, you won't beat someone with information your model doesn't have.
- mathattack 10y ago
  Read up on SAC (Point72). Quite a bit of insider trading. It isn't just about having great models. 51% of the world can't beat the median return. Everyone has great models. It's figuring out where the models are wrong that matter. (Example 1: Most Mortgage models assumed that housing values in all US markets couldn't go negative at the same time) Sometimes that's by qualitative insights. But that's very very hard. And sometimes it's by having someone give some info that they shouldn't.
zackchase 10y ago
These are strong arguments. Unfortunately, while sometime interpretability addresses a fundamental (not frivolous concern), it's also true that often interpretability is sometimes contrived to serve some irrational bias or political motive. I think this is expressed in the paper's discussion section: "We should be careful when giving up predictive power, that the desire for transparency is justified and isn’t simply a concession to institutional biases against new methods."

by p4wnc6 10y ago

mathattack 10y ago

For hedge funds, doesn't it still ultimately come to the bottom line? My experience with traders and hedge fund quantis is ultimately they get paid a % on revenue or gains - for junior people it's more political, but the more senior they get the more it's correlated. This doesn't count sell side marketing work, or slow money (insurance, mutual fund) buy side work where people get paid for Assets Under Management versus a % of the gains.

p4wnc6 10y ago
Not really. Some hedge funds might be somewhat better, but there are many kinds of hedge funds. A large number of them function in almost precisely the same manner as a traditional asset manager, and are compensated and incentivized in the same way. As a non-manager employee at these firms, your bonus is still usually expressed as a percentage of your base salary with the caveat that it is awarded in a discretionary way that is based on firm performance, but is not given by any explicit formula connected to profits or losses. Some firms also don't even bother to give any details whatsoever, and the job offer will simply say there is a discretionary bonus, no percentage, no description at all. I actually turned down a hedge fund job because of this. I told them that in order for me to feel comfortable accepting an entirely discretionary bonus, with no baseline or agreed upon way of relating it to base salary or profits and losses, I would need a much higher base salary, and they weren't willing to negotiate about it. The number of firms, even among extremely quant-heavy hedge funds, who award bonuses in a manner that is not overwhelmingly political is exceedingly tiny. What this means is that the same political incentives affect even most hedge funds, and so they care far less about the mathematical rigor of what they are doing than about how to sell political stories about it. If "interpretability" sells political stories, then that's what they'll do. Where are the hedge funds using sophisticated statistics? Maybe Renaissance. Maybe. Where else? Certainly not DE Shaw. Certainly not PDT. Certainly not G-Research. Certainly not Coatue. And on and on. When you interview at these places, and see how the sausage is made, it is eye-opening and alarming to understand just how little their business utilizes or cares about mathematics, statistical rigor, and often not even proper software design. They are just more of the same kinds of shoddy software shops cranking out ad hoc code for rapidly varying political whims, but with far better branding.
- jxramos 10y ago
  All this discussion makes me think about that bet Warren Buffet issued some years back about dumb index vs managed hedge fund. Political authority is an interesting slant to all this. Makes me also think about Thomas Sowells "varieties of nothing", ie putting on a show to make it look like someone is doing something when their net contribution is near nil. http://www.npr.org/2016/03/10/469897691/armed-with-an-index-fund-warren-buffett-is-on-track-to-win-hedge-fund-bet http://www.npr.org/2016/03/10/469897691/armed-with-an-index-...

ACow_Adonis 10y ago

I work for a large-ish bank. Sadly can confirm everything this guy says is completely accurate. I'm trying to get out...

selectron 10y ago

Interesting. After watching the show Billions, and reading up on how much money hedge fund managers make on fees (seems totally ridiculous), I wonder how common is illegal insider trading for hedge funds? No matter how good your model is, you won't beat someone with information your model doesn't have.

mathattack 10y ago
Read up on SAC (Point72). Quite a bit of insider trading. It isn't just about having great models. 51% of the world can't beat the median return. Everyone has great models. It's figuring out where the models are wrong that matter. (Example 1: Most Mortgage models assumed that housing values in all US markets couldn't go negative at the same time) Sometimes that's by qualitative insights. But that's very very hard. And sometimes it's by having someone give some info that they shouldn't.

zackchase 10y ago

These are strong arguments. Unfortunately, while sometime interpretability addresses a fundamental (not frivolous concern), it's also true that often interpretability is sometimes contrived to serve some irrational bias or political motive. I think this is expressed in the paper's discussion section: "We should be careful when giving up predictive power, that the desire for transparency is justified and isn’t simply a concession to institutional biases against new methods."