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Hedge-fund managers that do the most research will post the best returns
- piker 9y agoWouldn't some sophisticated shops potentially use crawlers, etc. hosted from cloud providers (i.e., third-party IPs) that might significantly skew this data?
- scarletham 9y agoYes, exactly. Wouldn't surprise me if most of these firms were rescraping the data every night and overwriting.
- fwdpropaganda 9y agoWhy would they do that?
- scarletham 9y agoTake this with a grain of salt as I don't work at any of the funds mentioned (but still in the industry), but why not? Filings are subject to change due to errors, updates, etc. It's cheaper, easier, and less error prone to just scrape and overwrite data than search for any updates. I may have been heavyhanded in saying that the firms are rescraping the entire universe of filings on a daily basis, but I guess my point here is that these numbers can very easily be skewed and are generally a pretty poor indicator of actual data access.
- calabin 9y agoSEC EDGAR is terrible for a variety of reasons. It breaks, few things are truly standardized/normalized, etc. If you have the time and an invested interest there's no reason not to. Filings are subject to change but they are restated, not modified in place. That said, anything goes on the site. The only real reason not to scrape everything on a continuous loop is that there is a rate limiter in place, so you may end up impeding your intake of new data by loading yourself down with old jobs to handle.
- fwdpropaganda 9y agoI assumed the sophisticated shops ran their own datacenters. Can you imagine RenTech running their code on other people's computers? I can't.
- jeffreyrogers 9y agoSome do use AWS and other cloud providers for collecting and processing data.
- dsacco 9y agoYes, Renaissance runs everything on its own infrastructure (as do most firms of that caliber, and even a tier below). That said, many of these firms also ingest data from aggregated sources, so their research would activity be very difficult to accurately track via IP presence.
- sseveran 9y agoWhy? The reasons for having their own datacenters are either legacy or needing some sort of specialized hardware that is not available at a cloud provider. Mana which is a new pure quant fund uses AWS extensively.
- MagnumOpus 9y agoThe reason for having your own computers is assured secrecy of your algorithms, and complete control over redundancy, latency and network linkages. The reason for not having your own computers is because you can't afford them. A consideration for upstart funds, not a problem for RenTec.
- sseveran 9y agoIf it is discovered that Amazon is stealing data from AWS customers than AWS will go out of business fairly quickly. Also even though Mana is new they do have ~$1B AUM.
- fwdpropaganda 9y ago> Why? Because you don't want anyone to have access to your code and data. If you found out that Facebook is running on AWS, wouldn't you find that strange?
- osrec 9y agoI don't think they can really draw this conclusion. There are a great number of additional factors at play and accessing public sec records is a bit of a red herring. Especially considering that the funds they have listed as examples are primarily large high frequency algo funds (Renaissance and AQR) and are even less likely to find much utility in intermittent public filings. This may however be an indicator of diligence, but trying to link public information to a big increase in performance is somewhat far fetched.
- scarletham 9y agoTradeworx is HFT. Yes, the premise of this paper is completely absurd. Drawing a line between overnight batch jobs for internal databases and performance is a quantum leap to say the least.
- philfrasty 9y agoDo you know how these algo funds keep a competitive edge for so many years (e.g. Renaissance 30+ years)? I am trying to understand their "kind" of product innovation as in what are the biggest factors they are continuously trying to improve?
- wtvanhest 9y agoThey improve their model. The factors that allow them to capture alpha change so you cannot set it and forget it. The holy grail of investing would be a quantitative model which automatically changes and consistently outperforms everyone else.
- dsacco 9y agoRenaissance Technologies has completely automated the process of signal discovery.[1] They don't hire researchers to manually derive novel insights or trading models from data, and they don't really bother with exclusive sources of data. Instead, they hire researchers to improve methods for automatically processing vast amounts of arbitrary data and extracting profitable trading signals from it. When most funds say they're "quantitative", what they really mean is that they use huge amounts of data to inform fundamentally manual trading strategies (this includes most of the places widely considered to be "top" firms). They develop trading algorithms, and those trading algorithms are often successful. But the algorithms are developed manually and then deployed. Their researchers and engineers actively seek out new sources of data and try to compete on novel sources of untapped information. But the reality of what happens is that they simply drown in the data. They can't clean it or process it nearly fast enough to maintain long term trading strategies, nor can they even begin to find a way to automate the trading strategy extraction. If you're working with hundreds of terabytes of data, you cannot selectively formulate hypotheses and test them. It's far too slow. You will find dramatically fewer novel insights than a fully automated process. In other words, they're a step above traditional "fundamental" hedge funds, but they focus on the wrong problem (but not for lack of trying!). In contrast, the truly successful quant funds have automated the data processing and feature extraction pipeline end to end. The data is a pure abstraction to them. They don't bother with forming hypotheses and trying to find data to test them, they allow their algorithms to actively discover new correlations from the ground up. So many quantitative funds advertise how much data they work with, and how they have all these exotic sources of data at their disposal...but the data does not matter. The models for the data do not matter. The mathematics of efficiently processing that data are what matters. As a result of their consistent profitability, most of the jobs you see listed for the really successful funds (if they have a website) are not "real" in the strictest sense of the word. You can apply to them, but they only keep active careers pages to attract the best researchers. Their only incentive to hire is to 1) keep someone who is actually exceptional from joining a competitor or 2) keep an academic researcher from re-discovering their work when they seems like they're getting close to it. This is why they primarily focus on quantitative PhDs in information theory, high energy physics and computational mathematics (especially information geometry). To be completely frank, Renaissance is an outlier, but not just because of their returns. They're an outlier because of how public they are. Most of the funds with comparable returns not only don't take any outside investor capital, they only have 25 - 50 employees. They virtually never hire because they don't have to. If your work is fundamentally interesting, novel and applicable to what they're doing (even if you can't immediately see why), they will call you. ___________________________ 1. Other more secretive (but equally successful) funds have done this, but they are much more under the radar.
- avvt4avaw 9y agoHere is the paper, which is not linked in the news article - https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3127825 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3127825
- sdhgaiojfsa 9y agoSo they have an advantage against other hedge funds, but . . . most hedge funds underperform the market. So all you're doing by doing research is closing the deficit.
- chrisabrams 9y agoIn other news, students who study the most for SATs will post the best scores.
- TomK32 9y agoIn Germany, the poor who collect the most bottles have something to eat in the evening (barely exaggerated).
- jeremyjh 9y agoNo, this is surprising because the only research they measured is accessing SEC filings from the government’s website. Since this is the definition of public information, in an efficient market there should be no comparative advantage to having it because every manager should already be using it.
- dsacco 9y agoThe market isn't efficient. But more importantly, SEC filings are not the only data these firms use. It's just one source for which these researchers were able to capture access information. Comparatively speaking, the SEC filings are just a blip next the rest of the data gathered by quantitative funds. Any conclusion that could be drawn from what's contained in this report would be hopelessly misleading.
- savanaly 9y agoThis doesn't run afoul of my understanding of the EMH. I would expect an equilibrium for the stock market to be when the amount of trading by well informed individuals is such that the marginal cost of another hour of research is equal to the marginal benefit of another hour of research. Not: when the marginal benefit of another hour of research is zero.
- larrydag 9y agoThere is a lot of debate between efficient and inefficient market theories. Most hedge funds would ascribe to the inefficient market theory and so it is not surprising they are eating up public data.
- john-adword 9y agoYes is that right way
- coatmatter 9y agoAnd do those who do the most research seek the highest fees?
- dsacco 9y agoThose who do the most (productive) research often don't seek any fees, because most of them don't accept outside capital :)
- wgerard 9y agoNot surprised at all. Anecdote: A friend and I used to run a website that tracked activist short sellers and their campaigns, and published all that information as a nice centralized database basically. Hedge funds were, by far, the most interested in this - which was surprising to us, our original target audiences were auditors and legal firms. My impression from this experience is that the more successful hedge funds are just mass-ingesting data from everywhere they can, and somehow trying to make sense of it. It's totally an arms race too: Once one of them is ingesting data from a new source, everyone else has to start doing it as well lest they fall behind. It was significantly easier to convince new clients once we had a few clients already (very much like the FOMO people speak about when fundraising).
- otoburb 9y agoDid they scrape indiscriminately, or did they pay for access? I'm hoping it was the latter so you were able to keep the site self-sustaining for a while longer.
- wgerard 9y agoThe info was gated behind a paid login, so thankfully we didn't have to worry too much about scrapers. We also set up a notification system when new campaigns came out, so they didn't have to long poll for new info. We actually did have quite a few people scraping our homepage for some reason (which was rarely, if ever, updated) but they were mostly other aggregators as well, not potential clients.
- dsacco 9y agoDid you keep up with that project or move on to something else? It's humorous to me that most people who end up selling data to hedge funds more or less "fall" into that industry by accident. Your story is exactly how it typically happens: you develop a new data-enabled product for one market, then a bunch of hedge funds find it and realize it's useful. Most companies pivot from their original market once they realize how lucrative selling data can be.
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- vanderZwan 9y ago> "The fact that public information acquisition relates to performance is surprising. SEC filings are the very definition of 'public' information, and therefore, usage of such information should not be profitable," Honest question: isn't that a contradiction in terms? Public information stands for "stuff that everyone is presumed to know", right? Like, economists using an assumption of "perfect knowledge of the market regarding public information" (or something like that, I'm obviously not an economist) as an approximation in their knowledge. But the fact that some managers do look this up, and some don't, means that this approximation does not hold. The premise of what is implied with "public knowledge" is undermined by the very thing being measured. Assuming I understand this correctly, it looks to me like they essentially correct for the error caused by this assumption of perfect knowledge, which is the opposite of unexpected (but still a very neat finding!)
- Retric 9y agoThe assumption is less that every individual has perfect information, rather that the market as a whole has that information. For example arbitration is assumed to 'work' however it's also assumed the returns will be driven down over time.
- dsacco 9y agoIt's not a contradiction. A better, more formal definition of "public" would be, "information which is sufficiently accessible that its price impact has diffused through the market." In the context of capital markets, "public" doesn't mean that everyone knows it, it means that it's essentially accessible to anyone (in a reasonably similar slice of time). As a corollary, it also means that public data has more or less exhausted its (individual) impact on the market. Most "public" information is actually woefully underutilized. The only real requirement for data to be public is that everyone could know it, not that everyone does know it.
- vanderZwan 9y ago> "information which is sufficiently accessible that its price impact has diffused through the market." Thank you (and Retric) for explaining, but this phrasing does not quite convince me: it does not explain how this diffusion is supposed to take place, and I for one cannot imagine a way of this knowledge to be distributed among the market as a whole without individuals knowing this information and freely sharing it together. Which again seems to be fundamentally undermined by what was measured. I mean, yes, there are situations in which you can distribute knowledge among people where no individual can see the whole picture, but together they manage (for example, the knowledge required to turn crude oil into plastic requires knowledge among every step of production, diffused among individuals - nobody truly "knows" how to turn crude oil into plastic if you define that as knowing everything involved in the process). I do not see that kind of context apply here though.
- thedevil 9y agoAround 2008, I read some public filings by banks. I made only two back-of-the-napkin adjustments: 1) I combined off-balance sheet assets and liabilities into the balance sheet, and 2) I changed the expected % losses to approximately that of Wells Fargo. With those two simple adjustments, I saw that some big banks were in the hole by (combined) tens of billions of dollars. The market prices for these banks made it clear that major investors either didn't read or didn't understand the data in the public filings. Fun fact 1: My bank WaMu which was itself was maybe $0-$10B in the red so I immediately withdrew $2K in panic. I found that money hidden in my filing cabinet about 5 years ago. Fun fact 2: What was even more crazy is that a famous private equity firm (I think TPG) had just dumped in billions of dollars into WaMu but that still didn't fill the hole (and why would such a big firm be less sophisticated than a nobody like me?) Fun fact 3: FDIC had ~$50B at the time, which maybe wouldn't cover the losses at the pessimistic end of my estimates. Fun fact 4: In accounting classes, I identified 3 very shady areas of accounting: options, off-balance sheet entities, and pensions. I believe the first two have since been fixed but I think pension accounting is still very shady so... beware. Disclaimer: I studied finance and accounting in school and read 10-Ks in my spare time in the early 2000s so I have some knowledge of accounting shenanigans. I also had some experience in real estate. But that's about all the expertise it took. (Several edits made to improve readability.)
- vanderZwan 9y agoI guess that when you say "all the expertise it took", you're comparing yourself to hedge-fund managers and major investors?
- thedevil 9y agoYeah, I assumed that some large investors (e.g. hedge funds) would have someone skilled in accounting shenanigans and would make big bets to move the market to reflect the information that was publicly available.
- charlesdm 9y agoEvery single public company is well versed in accounting shenanigans, often to the tune that you almost can't figure out anymore whether someone is making a profit or not. Also, an accounting loss isn't always a "real" loss. For example, with the recent tax overhaul, some companies booked unexpected losses because they had significant carry forward losses. Those were reduced in value because the corporate tax rate went down. But essentially nothing changed -- yes the tax base and book value of these losses were adjusted, but no cash was lost. They can also push revenue or profits back or pull it forward. It really is a jungle out there.
- meri_dian 9y ago>"Perhaps most surprising, the researchers found the median fund-month download amount is only four filings while the mean was 672, suggesting that relatively few funds are accessing vastly more information." Interesting...
- taneq 9y agoIt's almost like knowledge is power or something.
- radnam 9y agoIs there a good resource to help understand how to read/interpret SEC filings?
- hbcondo714 9y agoYou can try my site Last10K.com which uses sentiment analysis to find & highlight positive & negative remarks in lengthy 10K/Q filings. Here's an example from Burlington Stores' 10K this week where we found 60 positive and 15 negative remarks by their management team: https://www.last10k.com/sec-filings/BURL#fullReport https://www.last10k.com/sec-filings/BURL#fullReport
- frockington 9y agoMartin Shkreli posted some finance tutorials on YouTube that go into depth on the subject and don't assume any base knowledge
- source99 9y agoHow did the university get the IP addresses of computers that access the SEC website?
- batterseapower 9y agoPublic info: https://www.sec.gov/dera/data/edgar-log-file-data-set.html https://www.sec.gov/dera/data/edgar-log-file-data-set.html
- dzonga 9y agoIsn't all Warren Buffet & Charlie Munger do for a good portion of the day, like 6 hours is 'READ & THINK'. Then do nothing else.
- hbcondo714 9y agoOther guys read playboy, I read annual reports - Warren Buffett
- make3 9y agothat's basically what any analyst or researcher does, right. then, I guess an analyst writes a simulation to test his theories & a report. these hot shots likely just have other people their theories, indeed, but still likely write some amount of reports
- whatok 9y agoI'd imagine most of the firms ranking here are not reading the reports at all.
- rockinghigh 9y agoAs a CEO of a conglomerate with 370k employees, I doubt Warren Buffet spends most of his time picking stocks.
- sumedh 9y agoThat is what he say he does pretty much all day, he believes in extreme hands off approach so that he does not have to waste time with the day today operations of running a conglomerate.
- synaesthesisx 9y agoI personally know and have worked with a few people who manage hedge funds (with a combined hundreds of millions in AUM). So fun fact: one of the tight-lipped secrets about the hedge fund industry (which could arguably also be said for a lot of the financial industry) - is that none of them actually know what they're doing. Characters like Ackman, Shkreli, etc all sell the idea that they know what they're doing, when the reality is it's simply gambling with other people's money with minimal risk. Luck will favor some, and others...not so much. The entire industry is essentially a collective delusion/sham.
- physguy1123 9y agoThis is certainly true of most stock-picker type hedge funds, but there are legitimate strategies that aren't a shirty replication of an index fund. Unfortunately, stock-pickers have somehow become most of the industry seem to be most of the industry (probably because there's no real talent or capital constraints on them).
- bilkoo 9y agoWell couldn't it have been the opposite? Hypothesis: maybe this kind of research has the least marginal return, therefore only the most profitable funds are willing (or able) to invest in it (Bridgewater would invest $10M for 0.1% of improvement while a small fund can't afford that luxury given that 0.1% is fund size independent).
- chris11 9y agoI don't know, I would think that the cost of finding good investment opportunities would increase as a fund gets bigger assuming all the funds have enough money to operate well. An opportunity to invest 20 million dollars with an expected profit of 50% would be a lot better for a fund managing $300 million, but not as exciting for a fund managing $3 billion.
- padseeker 9y agoIt's not good enough to be the best hedge fund manager. You need to make more profit that investing in a boring index fund, including the additional overhead of moving money around. And the research seems to show that most fund managers do not. https://www.npr.org/sections/money/2016/03/04/469247400/episode-688-brilliant-vs-boring https://www.npr.org/sections/money/2016/03/04/469247400/epis...
- whatok 9y agoTwo things I can gather from this if it happened to hold true across the hedge fund universe: 1. Large shops employ a lot of fundamental analysts and larger funds only get large through outperformance. 2. Less on the fundamental side, funds regardless of size that have automated retrieval (and likely processing of public filings) probably have a higher than average disciplined investment process which leads to outperformance.
- hinkley 9y agoThe only time I hosted a booth at a trade show, I got a few people who sounded interested in our product at first but who quickly tangented off into more general questions. As one of my coworkers explained, there are investors of varying caliber wandering around and they often aren’t interested in your company. They’re getting the gestalt from the show floor by picking any brain that will give them the time of day.
- kernelPan1c 9y agoI wonder how Rice got this data. The more interesting story is that if you can get this data (MITM or some other means), you could front run a fund by figuring out who they’re researching.
- kusmi 9y agoI tried to get bulk data from EDGAR a while back. Turns out bulk data acquisition has been turfed to a third party, which charges for downloads. This is supposed to be federal free data, I was so pissed off. I am still pissed off.
- __john 9y agoHow long ago was this?
- kusmi 9y agoHalf a year?
- rpedela 9y agoHuh? It takes time to download all the filings by parsing the index for free [1] but it can be done. You also have to add back off logic when you get a "too many requests" error, but it isn't that hard. I did it and I am still updating as new filings are posted. 1. https://www.sec.gov/edgar/searchedgar/accessing-edgar-data.htm https://www.sec.gov/edgar/searchedgar/accessing-edgar-data.h...
- vfulco 9y agoWow, incredible discovery. Otherwise, water is wet.
- MaysonL 9y agoThe most surprising fact for me in this article is that there are hedge funds which don't access any SEC filings in any given month.