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Note: This is merely my opinion... The only way they're making money like this is by cheating the system. I highly suspect they're using their public funds to

Note: This is merely my opinion... The only way they're making money like this is by cheating the system. I highly suspect they're using their public funds to feed data into their private one in order to siphon off profits. It's like a pyramid scheme except the mechanism of moving money is a form of market manipulation and this article is playing right into their hands by making them sound like geniuses ("it's all scientists!"). Clearly, if this business is run by "smart people" (scientists) then their other two funds--which are actually accessible--must be promising! Right!? TL;DR: The investors in the public funds are likely being scammed.

branchless 10y ago
The system itself is broken. Money is supposed to be a proxy for value added, yet these guys are adding nothing. Don't come at me with the "investing in winners" guff. They are taking real wealth.
- sunsu 10y ago
  "taking real wealth" from whom? It is not a zero sum game.
  - grogenaut 10y ago
    If as the GP suggests they're making moves based on certainty of the larger fund's move, they can often be making the larger fund's gains smaller, which is counter to the interest of their customers in the larger fund.
  - branchless 10y ago
    Yes it is when you don't create wealth
    - ChuckMcM 10y ago
      Actually, it isn't. I believe you are conflating the concepts of "currency", "wealth", and "value." Here is an example I used with my kids once. Let's say you went the Pittsburgh Pirates game in 1978[1] and you caught the first home run hit by then rookie Barry Bonds. If you sold it in 1978 you would have been lucky to get $50 for it, if you sold it in 2007 when he retired with 762 home runs you could have gotten significantly more for it, perhaps several tens of thousands of dollars, and if you sold it in 2011 after he was tainted by steroids you would get less. But in all that time, the ball was just the ball. It's value went up, its value went down. As it went up and down the value of other home run baseballs also changed in value, but in ways completely unrelated to the value of Barry Bond's first home run ball. If you owned every single home run ball from the major league the value of any one ball was only related to that ball's history and not to the other balls. Quantitative analysis of markets is the art of figuring out how to recognize the value of something is changing before others do, and capture that value by acting on that knowledge. Whether it is offering to buy Barry Bond's first home run ball because your model suggests he could become an all time home run hitter, or selling it in 2009 because your model suggests Barry is likely to be tainted by the steroid scandal in baseball. You didn't steal any money, you didn't change the amount of "value" in the market, and the amount of "value" in the market it not controlled by a fixed number, its controlled by other events completely outside of your control. You bought something before others knew it would be valuable, you sold it before others knew it would be less valuable. Definitely not a zero sum game. [1] http://m.mlb.com/cutfour/2015/06/04/128375782/watch-barry-bonds-first-mlb-home-run http://m.mlb.com/cutfour/2015/06/04/128375782/watch-barry-bo...
      - mockery 10y ago
        If you had a magic oracle and, say, bought a ball for the fair price of $1 the day before you knew it would spike to $100, you are denying the seller an honest opportunity to sell it for $100. It's the moral equivalent of keeping your mouth shut when a clerk rings up an item for less than it costs. It might not be illegal, but it's certainly not "creating value" - you're using an information disparity to create a transaction with someone who wouldn't agree to your terms if they knew what you knew. ("Fools and their money" or something along those lines.) Of course, once you add in the realities of uncertainty and much longer time periods, you can make more subtle arguments about risk exposure, hedging, etc. But in the simplest case, trading on privileged information is absolutely zero-sum, at least in the sense that there's a clear winner and loser (and in the stock market, it's illegal!)
        branchless 10y ago
        The length he goes to for this thought exercise yet he stikes fresh air.
      - dingaling 10y ago
        > and if you sold it in 2011 after he was tainted by steroids you would get less To extend that analogy the trading company has a tap on the Reuters newsfeed and they sell the ball as soon as the steriod story reaches them, milliseconds before it reaches the newsrooms.
      - cousin_it 10y ago
        > you didn't change the amount of "value" in the market > Definitely not a zero sum game. Grandparent comment is right and you seem to misunderstand the idea of zero-sum. A transaction is zero-sum if it doesn't change the amount of value. The stock market is mostly zero-sum. The only non-zero-sum transactions are when firms sell their own stock to get spending money. The only added value of the stock market is choosing which of these transactions should happen. Since front-running doesn't affect these transactions, I think it's safe to say that front-running is zero-sum.
        10y ago
- deleted 10y ago
  [deleted]
- verbify 10y ago
  Some companies are going to be overvalued, and some undervalued compared to how much value they will make in the future (e.g. how much profit they will generate over a ten year period). If I manage to figure out that Company A is overvalued compared to Company B, and I short Company A in order to buy stock in Company B then by doing so, in a simple supply-and-demand model... Company A's stock will go down very slightly (because I shorted them), and Company B's stock will go up slightly (because I bought their stock). A higher stock value helps a company - they can sell some of their own stock in order to raise more funds. Therefore, the value I've provided is I've made a calculated decision that the economy should be spending more on (for example) robotics and less on coal because robotics companies are going to more successful, and coal less successful. Allocating funds to the more profitable companies and industries is one of the strengths of the market economy - it adds efficiency. Price-finding in general adds value. Also market liquidity adds value. I wouldn't discount what these people do, even if they are narcissistic selfish assholes as a breed.
  - branchless 10y ago
    Billions? Pull the other one. Someone is doing real work, these guys extract it as fiat tokens without adding enough value by a long shot, then they use that to get real things produced with real skill and effort, goods such as meat, wine, cars. The system imbues certain players with monetary tokens far exceeding value added.
    - verbify 10y ago
      Without being able to sell shares, a wine company that makes a profit can only grow by reinvesting their profit. E.g. it cost 100 tokens to set up the shop, it grows by 15 tokens a year, it has to wait 7 years before it can set up a different shop. With the ability to sell shares, once they prove a profitable business model, they can sell shares in order to grow the business into other areas. Without arbitrage, a wine shop that returns 15 tokens for every 100 invested might be able to sell shares at the same value as a meat shop that only makes 8 tokens for every 100 invested. Even though the wine shop is more popular, more profitable and providing more value to the market, it is forced to grow at the same rate as the meat shop. We need a system of allocating resources efficiently, and the economy will provide the most value possible. This is what arbitrage does. And you'd want pretty smart people doing it, as these decisions can cause the success or failure of companies. To put it in other terms, the footsoldiers might do the actual fighting, but I prefer to be part of an army with generals that decide where to place troops rather than one composed entirely out of 'actual fighting people' (or as you call it 'real things produced with real skill and effort, goods such as meat, wine, cars'). There are ways of cheating the system, and I support strong financial regulations. But that doesn't mean these jobs shouldn't exist in the first place or they don't provide any value.
keyle 10y ago
No I think you got it wrong. They're using a lot of algorithms to filter out the noise in the market and make speculative moves (bets, gambles) with a certain amount of certitude (weight, size) with the goal of making money. I believe they keep that fund private because the risk factors must be through the roof. And frankly, they don't need that external money to make a ton of more money. Do they have low latency, very fast computers, yes. Is it what's making the difference, no, I don't think so. It's the models they use to assess and predict - current and future moves - that makes the real difference.
- mistermann 10y ago
  And yet, despite the risk factors for the private funds being through the roof, they never lose money, and as another commenter pointed out, the public funds are losing money. I'm sure it's all on the up and up. ;)
  - oh_sigh 10y ago
    Right...why wouldn't they open that fund to others and rake in more in fees than they could ever make growing their own money? Seems fishy
    - tedunangst 10y ago
      Maybe they're content with the few billions they're making and like the autonomy?
    - freyr 10y ago
      Once a fund grows beyond a certain size, its trades can have significant influence on the market. This, in turn, disrupts the models that led to its success.
    - PeterisP 10y ago
      On that scale, for any trades/substrategies you can easily reach a cap where extra capital is not useful. If you can already run/extract all the deals that you want with your current capital, then taking in more money just distributes the same pie into smaller pieces.

branchless 10y ago

The system itself is broken. Money is supposed to be a proxy for value added, yet these guys are adding nothing. Don't come at me with the "investing in winners" guff. They are taking real wealth.

sunsu 10y ago
"taking real wealth" from whom? It is not a zero sum game.
- grogenaut 10y ago
  If as the GP suggests they're making moves based on certainty of the larger fund's move, they can often be making the larger fund's gains smaller, which is counter to the interest of their customers in the larger fund.
- branchless 10y ago
  Yes it is when you don't create wealth
  - ChuckMcM 10y ago
    Actually, it isn't. I believe you are conflating the concepts of "currency", "wealth", and "value." Here is an example I used with my kids once. Let's say you went the Pittsburgh Pirates game in 1978[1] and you caught the first home run hit by then rookie Barry Bonds. If you sold it in 1978 you would have been lucky to get $50 for it, if you sold it in 2007 when he retired with 762 home runs you could have gotten significantly more for it, perhaps several tens of thousands of dollars, and if you sold it in 2011 after he was tainted by steroids you would get less. But in all that time, the ball was just the ball. It's value went up, its value went down. As it went up and down the value of other home run baseballs also changed in value, but in ways completely unrelated to the value of Barry Bond's first home run ball. If you owned every single home run ball from the major league the value of any one ball was only related to that ball's history and not to the other balls. Quantitative analysis of markets is the art of figuring out how to recognize the value of something is changing before others do, and capture that value by acting on that knowledge. Whether it is offering to buy Barry Bond's first home run ball because your model suggests he could become an all time home run hitter, or selling it in 2009 because your model suggests Barry is likely to be tainted by the steroid scandal in baseball. You didn't steal any money, you didn't change the amount of "value" in the market, and the amount of "value" in the market it not controlled by a fixed number, its controlled by other events completely outside of your control. You bought something before others knew it would be valuable, you sold it before others knew it would be less valuable. Definitely not a zero sum game. [1] http://m.mlb.com/cutfour/2015/06/04/128375782/watch-barry-bonds-first-mlb-home-run http://m.mlb.com/cutfour/2015/06/04/128375782/watch-barry-bo...
    - mockery 10y ago
      If you had a magic oracle and, say, bought a ball for the fair price of $1 the day before you knew it would spike to $100, you are denying the seller an honest opportunity to sell it for $100. It's the moral equivalent of keeping your mouth shut when a clerk rings up an item for less than it costs. It might not be illegal, but it's certainly not "creating value" - you're using an information disparity to create a transaction with someone who wouldn't agree to your terms if they knew what you knew. ("Fools and their money" or something along those lines.) Of course, once you add in the realities of uncertainty and much longer time periods, you can make more subtle arguments about risk exposure, hedging, etc. But in the simplest case, trading on privileged information is absolutely zero-sum, at least in the sense that there's a clear winner and loser (and in the stock market, it's illegal!)
      - branchless 10y ago
        The length he goes to for this thought exercise yet he stikes fresh air.
    - dingaling 10y ago
      > and if you sold it in 2011 after he was tainted by steroids you would get less To extend that analogy the trading company has a tap on the Reuters newsfeed and they sell the ball as soon as the steriod story reaches them, milliseconds before it reaches the newsrooms.
    - cousin_it 10y ago
      > you didn't change the amount of "value" in the market > Definitely not a zero sum game. Grandparent comment is right and you seem to misunderstand the idea of zero-sum. A transaction is zero-sum if it doesn't change the amount of value. The stock market is mostly zero-sum. The only non-zero-sum transactions are when firms sell their own stock to get spending money. The only added value of the stock market is choosing which of these transactions should happen. Since front-running doesn't affect these transactions, I think it's safe to say that front-running is zero-sum.
      - 10y ago
deleted 10y ago
[deleted]
verbify 10y ago
Some companies are going to be overvalued, and some undervalued compared to how much value they will make in the future (e.g. how much profit they will generate over a ten year period). If I manage to figure out that Company A is overvalued compared to Company B, and I short Company A in order to buy stock in Company B then by doing so, in a simple supply-and-demand model... Company A's stock will go down very slightly (because I shorted them), and Company B's stock will go up slightly (because I bought their stock). A higher stock value helps a company - they can sell some of their own stock in order to raise more funds. Therefore, the value I've provided is I've made a calculated decision that the economy should be spending more on (for example) robotics and less on coal because robotics companies are going to more successful, and coal less successful. Allocating funds to the more profitable companies and industries is one of the strengths of the market economy - it adds efficiency. Price-finding in general adds value. Also market liquidity adds value. I wouldn't discount what these people do, even if they are narcissistic selfish assholes as a breed.
- branchless 10y ago
  Billions? Pull the other one. Someone is doing real work, these guys extract it as fiat tokens without adding enough value by a long shot, then they use that to get real things produced with real skill and effort, goods such as meat, wine, cars. The system imbues certain players with monetary tokens far exceeding value added.
  - verbify 10y ago
    Without being able to sell shares, a wine company that makes a profit can only grow by reinvesting their profit. E.g. it cost 100 tokens to set up the shop, it grows by 15 tokens a year, it has to wait 7 years before it can set up a different shop. With the ability to sell shares, once they prove a profitable business model, they can sell shares in order to grow the business into other areas. Without arbitrage, a wine shop that returns 15 tokens for every 100 invested might be able to sell shares at the same value as a meat shop that only makes 8 tokens for every 100 invested. Even though the wine shop is more popular, more profitable and providing more value to the market, it is forced to grow at the same rate as the meat shop. We need a system of allocating resources efficiently, and the economy will provide the most value possible. This is what arbitrage does. And you'd want pretty smart people doing it, as these decisions can cause the success or failure of companies. To put it in other terms, the footsoldiers might do the actual fighting, but I prefer to be part of an army with generals that decide where to place troops rather than one composed entirely out of 'actual fighting people' (or as you call it 'real things produced with real skill and effort, goods such as meat, wine, cars'). There are ways of cheating the system, and I support strong financial regulations. But that doesn't mean these jobs shouldn't exist in the first place or they don't provide any value.

keyle 10y ago

No I think you got it wrong. They're using a lot of algorithms to filter out the noise in the market and make speculative moves (bets, gambles) with a certain amount of certitude (weight, size) with the goal of making money. I believe they keep that fund private because the risk factors must be through the roof. And frankly, they don't need that external money to make a ton of more money. Do they have low latency, very fast computers, yes. Is it what's making the difference, no, I don't think so. It's the models they use to assess and predict - current and future moves - that makes the real difference.

mistermann 10y ago
And yet, despite the risk factors for the private funds being through the roof, they never lose money, and as another commenter pointed out, the public funds are losing money. I'm sure it's all on the up and up. ;)
- oh_sigh 10y ago
  Right...why wouldn't they open that fund to others and rake in more in fees than they could ever make growing their own money? Seems fishy
  - tedunangst 10y ago
    Maybe they're content with the few billions they're making and like the autonomy?
  - freyr 10y ago
    Once a fund grows beyond a certain size, its trades can have significant influence on the market. This, in turn, disrupts the models that led to its success.
  - PeterisP 10y ago
    On that scale, for any trades/substrategies you can easily reach a cap where extra capital is not useful. If you can already run/extract all the deals that you want with your current capital, then taking in more money just distributes the same pie into smaller pieces.