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I'm not a purist believer in the efficient market hypothesis. BUT, I doubt there's much alpha to be gained simply from looking at price data which is widely an
by DevX101 8y ago
I'm not a purist believer in the efficient market hypothesis. BUT, I doubt there's much alpha to be gained simply from looking at price data which is widely and publicly available. Also keep in mind that markets are dynamic feedback loops so even if this model had an edge, the act of publishing this article would work against you to neutralize that edge in the future.
There's a good reason the most successful 'quantitative' trading fund, Rennaisance Technologies is so secretive and subjects its employees to a lifetime NDA/non-compete.
If there is edge in the market (and I think there are anomalies that can be traded on), I would assume it to come from correlating proprietary datasets with price. Or datasets that have a high barrier to access/analyze. One example that I'd bet still works in some industries would be counting trucks from a supplier to estimate product demand before the companies announces earnings ;)
- SEJeff 8y agoRennaisance is one large quantitative trading firm, there are other bigger and more successful ones however. I happen to work for another very large and successful quant trading firm.
- a9entroy 8y agoWhich company would that be?
- turingcompeteme 8y agoBigger sure, but can you point to one that has had better performance than the medallion fund?
- SEJeff 8y agoMost of them aren't hedge funds, they're private (HFT, Electronic Trading, Botique Firms, Proprietary Trading are all terms you'll hear) so they don't have public data. It is literally impossible to prove without insider information. However the Virtu Financials, the Citadels, etc, will always exist, and will be doing exceptionally well whether people realize it or not.
- throwawaymath 8y agoYeah, a better name for these kinds of funds is "independent research groups." Edgestream is an example of another. Renaissance is the most (in)famous one, but many others exist which profitably manage tens to low hundreds of billions while employing only 10 - 100 people.
- turingcompeteme 8y agoI realize this doesn't actually matter and I feel weird defending Renaissance... but Virtu is a public company and hasn't been doing that well, and returns from Citadel's various funds are not hard to find. Also, I don't know how to compare a fund's returns to that of a private business. But Medallion has been around since before HFT was really a thing, and I'm not aware of any HFT places that have been growing at 70% a year for 20 years.
- sseveran 8y agoThese are wildly different businesses. Virtu is a global electronic market maker which in reality is more like a mature technology company than a risk taking hedge fund. Renaissance (Medallion specifically) is a weird fund that manages employee money. Citadel is a large, diversified financial services company that happens to have overlap with both of the previously mentioned firms. They have a large market making operation and offer a variety of different hedge funds that they market
- everdev 8y agoThese predictions can also be self-reenforcing. If enough money believes the model is accurate, it will create it's own market conditions. In a distopian AI stock prediction world the best model will be the one with the widest publicity and adoption, not the best data points.
- aggronn 8y agoThe problem I see with that hypothesis is that the asset pricing must eventually be tied to actual performance--while it may be self-reinforcing to some extend, if it _is_ fundamentally wrong, there will be a reckoning and an adjustment after a high value stock goes bankrupt, for example.
- derefr 8y agoBut the stock market isn’t just a bunch of people placing speculative bets about company performance; it’s a bunch of people placing speculative bets about company performance by buying shares of the companies. If the market is irrational, it can actually prop up companies that would otherwise go bankrupt.
- aggronn 8y agoI suppose they company could continuously issue stock in this case. But in this world, it actually makes sense for those companies to stop doing their normal business and just go into the business of selling their shares. This reality sounds absurd, but you could argue that BTC market is there. Enough of the market thinks that "always buy" is a good investment, regardless of the real-life value of the asset. Or maybe, less controversially, gold is that market. Any asset that is always increasing in value and not related to the real value of that asset is just a store of value.
- candiodari 8y agoBoth of those things have valid services that I pay for. BTC provides a number of services. From money changing and international money transfers to actual investment brokerage. Granted, the number of securities available in BTC is less than spectacular, but it's not zero. I pay for both those services. Now you may argue that those are unregulated services and therefore have trust issues, but one might argue that all markets have trust issues, and the only difference is the level. BTC, so far, seems to be more trustworthy than, for instance, the ECB (e.g. the Greek payment limits and the Cypriot bail in, one of which affected me, and both of them used MY money to achieve political aims, without my approval). Gold provides a store of value, with a good story behind it. I pay my bank, I believe, around $40 per year for that same service. With frankly, not as good a story behind it (as I trust my bank less than I'd trust a bar of gold under my pillow when it comes to still having value tomorrow. Not that I have the kind of spare change to make that a pressing issue, but ...) So given that both BTC and Gold provide services that clearly people are willing to pay for, who's to say they shouldn't have a valuation based on that income like every other financial service provider in the world ?
- steve19 8y agoHow does a lifetime non-compete work?
- hhmc 8y agoI'm shocked that would be even close to enforcable.
- C1sc0cat 8y agoMe too I suppose if you where payed for life to not work in the field and would probably not be enforceable.
- timeseries2018 8y ago>> if you where payed if you were paid
- mark212 8y agodon't worry, it's not. Even in New York, has to be limited in time and geographic region. Good luck getting more than a year.
- poulsbohemian 8y agoI don't know anything about the finance industry, but it seems to me that there are a number of industries where the non-compete term is irrelevant, as you can still become persona non grata. For example Companies B, C, and D know that if they hire someone from Company A, they will get sued. The merits are irrelevant if Company A can outspend them relative to the value of the prospective employee.
- 0003 8y agoThey kill you.
- conanbatt 8y agoWell, if it's in the contract..
- C1sc0cat 8y agoA lifetime noncompete really I assume they pay you for life for this noncompete.
- DevX101 8y agoMy understanding is that legally, the contract says something reasonable, like a year. But the firm will use it's considerable resources to impede your career if you attempt to work in mathematical trading after that year's up. On the flip side, employees are compensated very well, and the turnover is very low.
- jermaustin1 8y agoI'd assume turn over is low if by leaving they now have to change entire career paths. I'd put up with a lot of shit to not have to learn a brand new trade.
- abakker 8y agoThey make SO much money, though, and get access to the special employees-only fund, so I assume that employees that join are interested in staying.
- argonaut 8y agoThey don't. They're all qualified for machine learning or data scientist roles in any area of tech. That's a huge field. Most of them are also qualified for general software engineering roles; some of the people with more theoretical backgrounds might not be.
- smaddox 8y agoIf that's true, it's only a matter of time until they get sued and lose a large class action suit.
- lifeformed 8y agoWell, being an employee gives you exclusive access to the best fund in existence by far (35% return every year for decades). Nobody is going to want to kill their golden goose.
- alehul 8y agoRentech and the other more secretive top quant firms such as TGS and PDT use nearly exclusively public data. Funds like Two Sigma that haven't had as good (or scalable) returns are actually the ones that focus on novel data sources. In reality, everyone in this industry is drowning in data, and the real edge comes from learning how to more efficiently parse and analyze data rather than acquiring more of it. The top performing firms work at a level where the data is merely an abstraction; above-market returns can be achieved from nothing but public data sources, if you've automated the process of extracting signals.
- martinlaz 8y agoThese are bold claims with nothing to support them. Given the claimed secrecy, I don't see how you could possibly know all that, unless you are (or have been) working for Rentech, or one of the others. Is that the case?
- thwy12321 8y agoFunny things I've heard about Two Sigma. Everyone on the outside: Two Sigma is the best. People at the top of the financial industry: Two Sigma is cheesy.
- csomar 8y agoThere is tons of opportunities in smaller markets that RT or others have no interest in, however.
- throwawaymath 8y agoI'm pretty sure that lifetime NDA is a myth. It gets repeated very often (like a lot of the Renaissance mythos) but I haven't seen evidence for it, and on its face it sounds flagrantly unenforceable. It could be that the compensation alone substantially reduces turnover. Likewise once they've hit "their number", employees may decide to go into tech or philanthropy instead of a competing firm. For what it's worth, Renaissance (remarkably, in my opinion) advertised a role in the most recent Who's Hiring thread.
- ttobbaybbob 8y agoThe NDA/non-compete may not enforceable, but if Renaissance believes employees with valuable IP are being poached, they will sue and make it very expensive to hire, then defend, ex-rentec employees. https://www.marketwatch.com/story/renaissance-millennium-settle-trade-secrets-dispute https://www.marketwatch.com/story/renaissance-millennium-set...
- JumpCrisscross 8y agoThey’re totally up front about this requirement, too, when making offers. (Source: I turned one down.) You are to move to Long Island, buy a house, buy into the employees-only fund and work there for the rest of your financial career.
- WrtCdEvrydy 8y agoLOL, No. How do you even enforce that? If I get a job somewhere else, there's no reason for me to disclose where I'm going.
- qaq 8y agoThey will prob run regular checks and you are prob. signing off on them having a right to do so.
- JumpCrisscross 8y ago> How do you even enforce that? By suing your new employer for $20 million [1]. (On the other side of the coin, they offer like a month of paid vacation a year, plus longer sabbaticals every few years, plus tons of benefits...if Long Island and math are your thing, it's a very nice place to work.) [1] https://www.marketwatch.com/story/renaissance-millennium-settle-trade-secrets-dispute https://www.marketwatch.com/story/renaissance-millennium-set...
- nabla9 8y ago> Rennaisance Technologies is so secretive and subjects its employees to a lifetime NDA/non-compete. Medallion fund is profit maker but their strategy is obviously very size limited. Their strategy does not scale. Betting syndicates can make similarly massive ROI, but they are very growth limited.
- JohnJamesRambo 8y agoWhat is a betting syndicate?
- TomK32 8y agoFor example this one https://news.ycombinator.com/item?id=16985413 https://news.ycombinator.com/item?id=16985413
- pcprincipal 8y agoI 100% agree with this as a Daily Fantasy Sports player who has published some blog posts and code related to strategy. Any success I've had has been in sports and formats that are not popular and I purposely do not write or open-source code on. Edge can go away almost immediately; I saw this firsthand in DFS when a number of websites came in with free tools that pros had been using for years. I play in the stock market a little and my best wins have been on small cap stuff where I've had some edge with unique knowledge of the industry and have taken the time to read SEC filings / keep tabs on earnings reports / closely watch competitors, acquisitions, etc. To be clear, I still think this article is great from a learning about Keras perspective. That said, to anyone who thinks building some ML models and outperforming the market is easy, remember that edge is only as good as the number of participants in the market who don't have it.
- tomazio 8y agoI'm very interested to read some of your blog posts related to strategy/code around DFS, but I don't know what your blog is. Would you mind posting a link to one of these posts?
- pcprincipal 8y agoDefinitely, sorry for late reply. Here's a few: - Pick Em strategies on DraftKings - https://medium.com/draftfast/evaluating-possible-strategies-in-draftkings-pickem-ba48a28ffcad https://medium.com/draftfast/evaluating-possible-strategies-... - Thinking in multiples - https://medium.com/draftfast/thinking-in-multiples-7e7c76ee2b1d https://medium.com/draftfast/thinking-in-multiples-7e7c76ee2...
- T-A 8y ago"A research scientist and senior level employee who worked out of his Pennsylvania home […] His noncompetition agreement prevented Magerman from working for one year after leaving Renaissance for any firm engaged in the business of mathematically-based trading of futures and securities." [1] Not quite lifetime, unless they expected him to drop dead within a year. [1] https://www.forbes.com/sites/nathanvardi/2017/05/08/inside-the-employment-agreement-of-secretive-hedge-fund-renaissance-technologies/ https://www.forbes.com/sites/nathanvardi/2017/05/08/inside-t...
- auntienomen 8y agoMagerman was an early employee. Not sure his agreement would be typical.