4 ms·

They do if you think balancing an index weighed fund is high math.

by mianos 9y ago

cheez 9y ago
For the most part, execution does not require high math, but the modeling required to find arbitrage or alpha does. So for example, managing an index weight fund is simple on the face of it but when and how you choose to rebalance your portfolio can affect your drift. This is the part that requires high math. This is even more important if you're talking a billion dollar fund as opposed to a 100,000 personal account.
- lisper 9y ago
  > the modeling required to find arbitrage or alpha does Not really. Even if everyone is just throwing darts, half of the players will beat the market, and the more players you have the more extreme the outliers will be. Of course, the converse is also true, but no one pays attention to the losers. Both Vegas and Wall Street prosper from this same principle.
  - cheez 9y ago
    I also think so, but... Gotta keep up the charade imo. Can't prove otherwise.
  - vowelless 9y ago
    > half of the players will beat the market For how long? And if it is for more than one sample (year), then how do you explain the continued success of places like Renaissance Technologies? > Both Vegas and Wall Street prosper from this same principle. I think poker is probably the closest thing in Vegas that matches Wall Street. Probably why it is so popular among quants.
    - moxious 9y ago
      There's such a thing as real alpha and also just luck. In a market with so many players, you would also expect that random chance would predict many people winning consistently year after year. This is not to say that all such funds can be explained this way. But most of the successful ones likely yes
  - dsacco 9y ago
    Virtu only lost money trading one day out of 1278 trading days between 2009 and 2014. In the most uncharitable analysis (1278/2; or the lost day happened in the middle), they had a 0.5^639 chance of doing that. Maybe you disagree with 0.5 per day. Let's make it 0.9! ...But that's still 5.7 x 10^-30. How many firms do we need to exist for this to emerge by chance? This and website bug bounties being sold on the black market are my two HN crusades. I have heard darts, I have heard coin flipping; I hear all manner of analogies from people who stubbornly insist or strongly imply that consistently, purposely beating the market is infeasible in principle. But no one ever does a modicum of analysis to support whatever trite analogy that's thrown out, they just wave their hands and exclaim, "statistics!". So here is something actually quantifiable. If you have something quantifiable to refute my analysis of your analogy in turn, please share it by all means.
    - kasey_junk 9y ago
      > Virtu only lost money one day out of 1278 trading days Lost money trading. If they made $1 trading that counted though I assure you that day was a loser from a business perspective. I also have not lost money trading in 3 years, simply by not trading at all. It doesn't really detract from your broader point, which I don't have a strong opinion on but that stat is a pet peeve of mine as it's fairly meaningless.
      - dsacco 9y ago
        Fair enough, that's correct :) But as you said, it doesn't detract from the point, even if we shift the definition a bit. The likelihood is still clearly beyond what would emerge by chance.
      - SEJeff 9y ago
        This is massively incorrect. If Virtu only made $1 trading, they would still make massive amount of $$$ via exchange rebates, as they are a designated market maker. In fact, they aren't the only market maker that does this. A market maker guarantees they'll take trades on both sides of the book, so long as their strategies aren't grotesquely losing, they'll always come out ahead due to exchange rebates. http://www.investopedia.com/articles/active-trading/042414/what-makertaker-fees-mean-you.asp http://www.investopedia.com/articles/active-trading/042414/w... Source: I worked for Virtu's predecessor Madison Tyler for 4 years and for Virtu after it merged with Madison Tyler for ~8 months and have first hand experience with HFT.
- tptacek 9y ago
  What's the "high math" we're talking about here? Stochastic calculus?
  - deleted 9y ago
    [deleted]
  - princeb 9y ago
    for index funds the core problems are estimating risk and return, minimizing effect of uncertainty and std err on portfolio tracking, and fast optimization for large portfolios (>1000 assets). these are fairly long term problems so stochastic calculus not too useful here. portfolio risk is a very classic stats field.
    - princeb 9y ago
      just as an addendum. it's not really clear that the math is "high" from the above comment but portfolio management, even the really boring sounding ones like index replication, uses the entire gamut of "high mathematics": robust and Bayesian statistics, non-parametric statistics, extreme value statistics, signal processing, numerical optimization, etc.

They do if you think balancing an index weighed fund is high math.

by mianos 9y ago

They do if you think balancing an index weighed fund is high math.

For the most part, execution does not require high math, but the modeling required to find arbitrage or alpha does. So for example, managing an index weight fund is simple on the face of it but when and how you choose to rebalance your portfolio can affect your drift. This is the part that requires high math. This is even more important if you're talking a billion dollar fund as opposed to a 100,000 personal account.

lisper 9y ago
> the modeling required to find arbitrage or alpha does Not really. Even if everyone is just throwing darts, half of the players will beat the market, and the more players you have the more extreme the outliers will be. Of course, the converse is also true, but no one pays attention to the losers. Both Vegas and Wall Street prosper from this same principle.
- cheez 9y ago
  I also think so, but... Gotta keep up the charade imo. Can't prove otherwise.
- vowelless 9y ago
  > half of the players will beat the market For how long? And if it is for more than one sample (year), then how do you explain the continued success of places like Renaissance Technologies? > Both Vegas and Wall Street prosper from this same principle. I think poker is probably the closest thing in Vegas that matches Wall Street. Probably why it is so popular among quants.
  - moxious 9y ago
    There's such a thing as real alpha and also just luck. In a market with so many players, you would also expect that random chance would predict many people winning consistently year after year. This is not to say that all such funds can be explained this way. But most of the successful ones likely yes
- dsacco 9y ago
  Virtu only lost money trading one day out of 1278 trading days between 2009 and 2014. In the most uncharitable analysis (1278/2; or the lost day happened in the middle), they had a 0.5^639 chance of doing that. Maybe you disagree with 0.5 per day. Let's make it 0.9! ...But that's still 5.7 x 10^-30. How many firms do we need to exist for this to emerge by chance? This and website bug bounties being sold on the black market are my two HN crusades. I have heard darts, I have heard coin flipping; I hear all manner of analogies from people who stubbornly insist or strongly imply that consistently, purposely beating the market is infeasible in principle. But no one ever does a modicum of analysis to support whatever trite analogy that's thrown out, they just wave their hands and exclaim, "statistics!". So here is something actually quantifiable. If you have something quantifiable to refute my analysis of your analogy in turn, please share it by all means.
  - kasey_junk 9y ago
    > Virtu only lost money one day out of 1278 trading days Lost money trading. If they made $1 trading that counted though I assure you that day was a loser from a business perspective. I also have not lost money trading in 3 years, simply by not trading at all. It doesn't really detract from your broader point, which I don't have a strong opinion on but that stat is a pet peeve of mine as it's fairly meaningless.
    - dsacco 9y ago
      Fair enough, that's correct :) But as you said, it doesn't detract from the point, even if we shift the definition a bit. The likelihood is still clearly beyond what would emerge by chance.
    - SEJeff 9y ago
      This is massively incorrect. If Virtu only made $1 trading, they would still make massive amount of $$$ via exchange rebates, as they are a designated market maker. In fact, they aren't the only market maker that does this. A market maker guarantees they'll take trades on both sides of the book, so long as their strategies aren't grotesquely losing, they'll always come out ahead due to exchange rebates. http://www.investopedia.com/articles/active-trading/042414/what-makertaker-fees-mean-you.asp http://www.investopedia.com/articles/active-trading/042414/w... Source: I worked for Virtu's predecessor Madison Tyler for 4 years and for Virtu after it merged with Madison Tyler for ~8 months and have first hand experience with HFT.
tptacek 9y ago
What's the "high math" we're talking about here? Stochastic calculus?
- deleted 9y ago
  [deleted]
- princeb 9y ago
  for index funds the core problems are estimating risk and return, minimizing effect of uncertainty and std err on portfolio tracking, and fast optimization for large portfolios (>1000 assets). these are fairly long term problems so stochastic calculus not too useful here. portfolio risk is a very classic stats field.
  - princeb 9y ago
    just as an addendum. it's not really clear that the math is "high" from the above comment but portfolio management, even the really boring sounding ones like index replication, uses the entire gamut of "high mathematics": robust and Bayesian statistics, non-parametric statistics, extreme value statistics, signal processing, numerical optimization, etc.