6 ms·

Coming from a CS/Econ/Finance background.... Efficiency as “the market fully processes all information” is decidedly untrue. Efficiency as “Its very hard to a

Coming from a CS/Econ/Finance background.... Efficiency as “the market fully processes all information” is decidedly untrue. Efficiency as “Its very hard to arb markets without risk better than a passive strategy” is very true. Most professional money managers don’t beat the market once you factor in fees. Many private equity funds produce outsize returns, but it’s based on higher risk and taking advantage of tax laws. Over time, positive performance for mutual funds don’t persist. (If you’re in the top decile performance one year, you’re no more likely to be there next year) Despite all of this, there are ways people make money. But it’s a small subset of professionals. It’s high frequency traders who find ways to cut the line on mounds of pennies. It inside information from hedge funds. Or earlier access to non public information. But it’s generally not in areas that normal people like you and me can access.

benj111 8y ago
>Efficiency as “Its very hard to arb markets without risk better than a passive strategy” is very true Isn't that the best we can hope for though? The inefficiency is basically not knowing how to price something, which on some level is always true. At the moment a giant meteorite strike is priced at a level that is probably wrong? Tomorrow the meteorite will or won't strike and tell us which way we were wrong. Essentially outperformance is down to being quicker on the trigger. Edit: Or as you say, guessing whether the meteorite will or won't strike.
bitxbit 8y ago
People can still make money because it’s still a rolodex game.
- mruts 8y ago
  Most hedge funds are making worse returns than average investors. They only funds that are consistently making money are highly sophisticated quantitative top-down systematic traders. And their returns having nothing to do with their rolodex. Names like RenTech, Bridgewater, AQR, 2 Sigma.
subjectHarold 8y ago
Most professional money managers aren't trying to beat the market. Distribution is way more important than performance. Trying to outperform the market is risky. Even if you have a good fund manager, they will eventually go elsewhere (if you look at most of big managers, but not all, their business model is turning a 0x employee into a 1x employee...10x employees get paid their marginal product). The key to running an asset management business is marketing, and building assets with unsophisticated clients that won't sell (mainly retail investors/advisers). This doesn't work as well anymore but it is very weird to argue that mutual funds are meant to beat the market. That was never the pitch. It is also fairly straightforward to outperform the market if you are a retail investor, you have a huge edge: size. You have just to look at the stuff that no-one else is looking at. I am not sure why but people have extreme amounts of difficulty with this concept. People become investors because they want people to think they are big time, they want respect...they don't really care about performance. I remember a few years ago, when I worked in the industry, I came across a one-month 15% arb. My job at the time was to pitch ideas, and no-one was interested..."it isn't what we/I do". I cleaned out my account, sold everything, borrowed a substantial amount...99% of people won't do that. It is crazy to them...but investing is simple: look at what everyone else is doing, and don't do that because it is fucking dumb. Also, most HFs don't have non-public information...sorry, they just don't. Some people are just genuinely better at making decisions than other people - 95% of people make the same mistake over and over, regardless of intelligence...ppl who are too smart usually do worse imo - and the most successful get around the problem of scale (a good example is Baupost: they invest in complex stuff that no-one else is trading).
ggm 8y ago
It inside information from hedge funds. Or earlier access to non public information. But it’s generally not in areas that normal people like you and me can access. Asymmetric information is pretty far from what used to be said about the perfect market and rational actors. It's "there's a sucker born every minute" and "if it seems too good to be true it probably is" economics.
- throwawaymath 8y ago
  I might be misunderstanding what you're saying here, but are you sure you're right? Fama originally predicated the model of the efficient market (the efficient market hypothesis) on the idea of informational efficiency. Information asymmetry is a fundamental measure involved in the idealized model of an efficient market. What you're mentioning about rational actors is actually a different topic altogether in economics. Or have I misunderstood what you're getting at?
  - westurner 8y ago
    I was interested, so I did some research here. Rational Choice Theory https://en.wikipedia.org/wiki/Rational_choice_theory https://en.wikipedia.org/wiki/Rational_choice_theory Rational Behavior https://www.investopedia.com/terms/r/rational-behavior.asp https://www.investopedia.com/terms/r/rational-behavior.asp > Most mainstream academic economics theories are based on rational choice theory. > While most conventional economic theories assume rational behavior on the part of consumers and investors, behavioral finance is a field of study that substitutes the idea of “normal” people for perfectly rational ones. It allows for issues of psychology and emotion to enter the equation, understanding that these factors alter the actions of investors, and can lead to decisions that may not appear to be entirely rational or logical in nature. This can include making decisions based primarily on emotion, such as investing in a company for which the investor has positive feelings, even if financial models suggest the investment is not wise. Behavioral finance https://www.investopedia.com/terms/b/behavioralfinance.asp https://www.investopedia.com/terms/b/behavioralfinance.asp Bounded rationality > Relationship to behavioral economics https://en.wikipedia.org/wiki/Bounded_rationality https://en.wikipedia.org/wiki/Bounded_rationality Perfectly rational decisions can be and are made without perfect information; bounded by the information available at the time. If we all had perfect information, there would be no entropy and no advantage; just lag and delay between credible reports and order entry. Information asymmetry https://en.wikipedia.org/wiki/Information_asymmetry https://en.wikipedia.org/wiki/Information_asymmetry Heed these words wisely: What foolish games! Always breaking my heart. https://deepmind.com/blog/game-theory-insights-asymmetric-multi-agent-games/ https://deepmind.com/blog/game-theory-insights-asymmetric-mu... > Asymmetric games also naturally model certain real-world scenarios such as automated auctions where buyers and sellers operate with different motivations. Our results give us new insights into these situations and reveal a surprisingly simple way to analyse them. While our interest is in how this theory applies to the interaction of multiple AI systems, we believe the results could also be of use in economics, evolutionary biology and empirical game theory among others. https://en.wikipedia.org/wiki/Pareto_efficiency https://en.wikipedia.org/wiki/Pareto_efficiency > A Pareto improvement is a change to a different allocation that makes at least one individual or preference criterion better off without making any other individual or preference criterion worse off, given a certain initial allocation of goods among a set of individuals. An allocation is defined as "Pareto efficient" or "Pareto optimal" when no further Pareto improvements can be made, in which case we are assumed to have reached Pareto optimality. Which, I think, brings me to equitable availability of maximum superalgo efficiency and limits of real value creation in capital and commodities markets; which'll have to be a topic for a different day.
miscreanity 8y ago
If you don't know about him already, you might find Martin Armstrong interesting. https://www.armstrongeconomics.com/blog/ https://www.armstrongeconomics.com/blog/
- Marazan 8y ago
  How's the sovereign debt crisis coming along? We're what, 3 years late at this point?
mruts 8y ago
I'm a finance professional as well, and I generally agree with you. But every consumer has access to one piece of very vital non-public information, Namely, his or her's personal preference. For example, say that I own a Tesla car, and think that it's pretty great. That's a very valuable piece of non-public information: I think Tesla cars are good. If one was to act upon this private information 3 or 4 years ago, they would have done very well indeed. Same with Google, or Amazon, or a multitude of other public companies. I think people overestimate how difficult it is to make money in the public markets as individuals. Hedge funds, and especially mutual funds, are quite constrained in their ability to up size positions and put on profitable trades. They have redemptions, they have to hold assets in cash to liquidate shares (mostly this in a problem for mutual funds, not hedge funds), they might have to hold a long only portfolio (again, a problem with mutual funds, not hedge funds). Individuals don't really have this problem, since they are managing their own money. If they want to put 50% of their capital into one name, no one is going to stop them. Moreover, they have full transparency into redemptions and inflows. I have personally have done quite well with my own investments, achieving a better return than the firm that I work at. This has only been possible because I have complete insight into my risk tolerance, and don't have management and performance fees eating into my returns. Another example. My wife's grandfather's wife in the early 2000s loved books and loved reading. Consequentially, she loved Amazon and what the company could provide for her. She convinced her husband to invest a sizeable chunk of their net worth (while not huge, was substantial, maybe 2 million) in one name, Amazon. They both dead recently, but the estate is very very valuable at this point, all because of that single Amazon investment shortly after they IPO'd. Just because there are huge players in the market, doesn't mean an individual can't compete. In fact, individuals are probably in the best position to reap the highest returns from the public markets.
- ForHackernews 8y ago
  The parent comment was talking about risk-adjusted returns. You're talking about inherently highly risky bets "50% of their capital into one name". I don't think it will surprise anyone that risky bets do sometimes pay off.
- JohnJamesRambo 8y ago
empath75 8y ago
I think people in our line of work can easily beat the market because we know how a lot of money is being spent and is going to be spent, well before finance guys do. I made huge returns buying amazon and nvidia 5 or 6 years ago because I worked for a big tech company just beginning big moves into aws and machine learning and everyone I knew at other companies was telling me the same story. I bought amazon at $300 and nvidia at $30. When people say you can’t beat the market, I think they’re wrong in that you can be well positioned to see large amounts of money being moved around well before the market becomes aware of it, if you’re in the right position. I think you just have to think hard about how well distributed the knowledge you have is. For example— I think we all know kubernetes is going to be a big big thing and it’s only getting started— I don’t think the market as a whole knows anything about it — my only question is which companies are set to profit from it? I suspect that commodity providers are going to slowly eat away at aws’s profit margins as people move to k8s hosting. But I don’t know who is going to be the big winner yet.
- berberous 8y ago
  What else did you own in those 5-6 years? What was your overall performance vs. the market?
  - empath75 8y ago
    Up about 350+% over all over the past 5 years even with some losers in there. I’m just picking stocks for fun and never put any more money than my initial stake. I recognize that there’s luck and risk involved. I’m just saying that if you think carefully and have access to information that’s not widely distributed, you can make money. I think one thing you have to get over is assuming that because everyone in your professional circle knows something, that everyone knows it. It can take years before disruptive change gets noticed, even while you’re working on it every day.
lettergram 8y ago
That’s actually a huge opportunity though. If you have a small edge in information, you can make millions. Undoubtedly, there can be no such thing as perfect market efficiency because information takes time (even in our interconnected age) to travel, be grok’d and then acted upon. Companies that focus on building an edge on either analytics or an edge on information gathering are where the real money is.
- njarboe 8y ago
  While a lot of people can acquire a lot of money by being a slightly better predictor of what the short term market thinks is the the future cash flow of public companies will be, it is a bit sad that this skill is valued so highly. So many really smart and hardworking people spend their whole lives doing it. They can end up with a lot of money, but I don't think they produce much wealth. Similar to how getting people to click on ads is really lucrative but also is more of a zero sum game than productive. Not sure how to get more people to work on more interesting things like fusion power, rocket ships, electric powered transportation, etc. instead of skimming off of zero sum transactions. Just taxing the rich at high rates also kills the few golden geese.
- sytelus 8y ago
  > If you have a small edge in information, you can make millions. This is one of the misnomer. Economics has enough random stuff and complexity that small edge doesn’t make huge difference. For example, you can get satellite photos of 100 sample Walmart stores and observe it’s parking lot to conclude that perhaps their quarter would end in negative side. But you might not be aware that the slack is being picked up more than enough by their online operations or that they have new deals for partnerships or some law about to be passed that taxes competition more.
  - pc86 8y ago
    To be fair, if you are making huge trading decisions like this on consumer retail, and ignoring the online component of the third largest online retailer in the US, you're going to lose all your money eventually anyway.
austincheney 8y ago
Pursuit of efficiency is a common mistake. I believe, though I could be wrong, that Bridgewater concluded the only goal in investing is to make the correct choice more than 60% of the time though greater than 80% is extremely stellar. So long as you make the correct decision more than the wrong decision and account for the degree of risk you can afford to be inefficient and still outperform the competition by an order of magnitude. Sometimes it is hard to know what the right decision is when current market forces suggest you should make the wrong decision or when every decision is apparently the right decision. In those cases you need historical data to compare against. The way they describe it it isn't any different than writing a basic algorithm, except there are many more variables to consider.
ptd 8y ago
If you don't mind sharing, how did you turn your CS/Econ/Finance background into a career? Feel free to be vague, but I'm curious as to how you make a living. Thanks!
- mathattack 8y ago
  Started in CS, became a database programmer, went to grad school in Econ and Finance. Spent some time in Capital Markets after school, but realized I liked tech more. (I liked studying Econ and Finance more than working in that environment. The opposite of CS. Maybe I identify more with programmers than financiers?) I combined the two in Fintech as a way to get back into technology. Now I work in the business side of tech.
  - ptd 8y ago
    Thanks for sharing! Hoping to follow in your footsteps, except with ds/ml instead of database. Nice to hear it’s working out for you.

benj111 8y ago

>Efficiency as “Its very hard to arb markets without risk better than a passive strategy” is very true Isn't that the best we can hope for though? The inefficiency is basically not knowing how to price something, which on some level is always true. At the moment a giant meteorite strike is priced at a level that is probably wrong? Tomorrow the meteorite will or won't strike and tell us which way we were wrong. Essentially outperformance is down to being quicker on the trigger. Edit: Or as you say, guessing whether the meteorite will or won't strike.

bitxbit 8y ago

People can still make money because it’s still a rolodex game.

mruts 8y ago
Most hedge funds are making worse returns than average investors. They only funds that are consistently making money are highly sophisticated quantitative top-down systematic traders. And their returns having nothing to do with their rolodex. Names like RenTech, Bridgewater, AQR, 2 Sigma.

subjectHarold 8y ago

Most professional money managers aren't trying to beat the market. Distribution is way more important than performance. Trying to outperform the market is risky. Even if you have a good fund manager, they will eventually go elsewhere (if you look at most of big managers, but not all, their business model is turning a 0x employee into a 1x employee...10x employees get paid their marginal product). The key to running an asset management business is marketing, and building assets with unsophisticated clients that won't sell (mainly retail investors/advisers). This doesn't work as well anymore but it is very weird to argue that mutual funds are meant to beat the market. That was never the pitch. It is also fairly straightforward to outperform the market if you are a retail investor, you have a huge edge: size. You have just to look at the stuff that no-one else is looking at. I am not sure why but people have extreme amounts of difficulty with this concept. People become investors because they want people to think they are big time, they want respect...they don't really care about performance. I remember a few years ago, when I worked in the industry, I came across a one-month 15% arb. My job at the time was to pitch ideas, and no-one was interested..."it isn't what we/I do". I cleaned out my account, sold everything, borrowed a substantial amount...99% of people won't do that. It is crazy to them...but investing is simple: look at what everyone else is doing, and don't do that because it is fucking dumb. Also, most HFs don't have non-public information...sorry, they just don't. Some people are just genuinely better at making decisions than other people - 95% of people make the same mistake over and over, regardless of intelligence...ppl who are too smart usually do worse imo - and the most successful get around the problem of scale (a good example is Baupost: they invest in complex stuff that no-one else is trading).

ggm 8y ago

It inside information from hedge funds. Or earlier access to non public information. But it’s generally not in areas that normal people like you and me can access. Asymmetric information is pretty far from what used to be said about the perfect market and rational actors. It's "there's a sucker born every minute" and "if it seems too good to be true it probably is" economics.

throwawaymath 8y ago
I might be misunderstanding what you're saying here, but are you sure you're right? Fama originally predicated the model of the efficient market (the efficient market hypothesis) on the idea of informational efficiency. Information asymmetry is a fundamental measure involved in the idealized model of an efficient market. What you're mentioning about rational actors is actually a different topic altogether in economics. Or have I misunderstood what you're getting at?
- westurner 8y ago
  I was interested, so I did some research here. Rational Choice Theory https://en.wikipedia.org/wiki/Rational_choice_theory https://en.wikipedia.org/wiki/Rational_choice_theory Rational Behavior https://www.investopedia.com/terms/r/rational-behavior.asp https://www.investopedia.com/terms/r/rational-behavior.asp > Most mainstream academic economics theories are based on rational choice theory. > While most conventional economic theories assume rational behavior on the part of consumers and investors, behavioral finance is a field of study that substitutes the idea of “normal” people for perfectly rational ones. It allows for issues of psychology and emotion to enter the equation, understanding that these factors alter the actions of investors, and can lead to decisions that may not appear to be entirely rational or logical in nature. This can include making decisions based primarily on emotion, such as investing in a company for which the investor has positive feelings, even if financial models suggest the investment is not wise. Behavioral finance https://www.investopedia.com/terms/b/behavioralfinance.asp https://www.investopedia.com/terms/b/behavioralfinance.asp Bounded rationality > Relationship to behavioral economics https://en.wikipedia.org/wiki/Bounded_rationality https://en.wikipedia.org/wiki/Bounded_rationality Perfectly rational decisions can be and are made without perfect information; bounded by the information available at the time. If we all had perfect information, there would be no entropy and no advantage; just lag and delay between credible reports and order entry. Information asymmetry https://en.wikipedia.org/wiki/Information_asymmetry https://en.wikipedia.org/wiki/Information_asymmetry Heed these words wisely: What foolish games! Always breaking my heart. https://deepmind.com/blog/game-theory-insights-asymmetric-multi-agent-games/ https://deepmind.com/blog/game-theory-insights-asymmetric-mu... > Asymmetric games also naturally model certain real-world scenarios such as automated auctions where buyers and sellers operate with different motivations. Our results give us new insights into these situations and reveal a surprisingly simple way to analyse them. While our interest is in how this theory applies to the interaction of multiple AI systems, we believe the results could also be of use in economics, evolutionary biology and empirical game theory among others. https://en.wikipedia.org/wiki/Pareto_efficiency https://en.wikipedia.org/wiki/Pareto_efficiency > A Pareto improvement is a change to a different allocation that makes at least one individual or preference criterion better off without making any other individual or preference criterion worse off, given a certain initial allocation of goods among a set of individuals. An allocation is defined as "Pareto efficient" or "Pareto optimal" when no further Pareto improvements can be made, in which case we are assumed to have reached Pareto optimality. Which, I think, brings me to equitable availability of maximum superalgo efficiency and limits of real value creation in capital and commodities markets; which'll have to be a topic for a different day.

miscreanity 8y ago

If you don't know about him already, you might find Martin Armstrong interesting. https://www.armstrongeconomics.com/blog/ https://www.armstrongeconomics.com/blog/

Marazan 8y ago
How's the sovereign debt crisis coming along? We're what, 3 years late at this point?

mruts 8y ago

I'm a finance professional as well, and I generally agree with you. But every consumer has access to one piece of very vital non-public information, Namely, his or her's personal preference. For example, say that I own a Tesla car, and think that it's pretty great. That's a very valuable piece of non-public information: I think Tesla cars are good. If one was to act upon this private information 3 or 4 years ago, they would have done very well indeed. Same with Google, or Amazon, or a multitude of other public companies. I think people overestimate how difficult it is to make money in the public markets as individuals. Hedge funds, and especially mutual funds, are quite constrained in their ability to up size positions and put on profitable trades. They have redemptions, they have to hold assets in cash to liquidate shares (mostly this in a problem for mutual funds, not hedge funds), they might have to hold a long only portfolio (again, a problem with mutual funds, not hedge funds). Individuals don't really have this problem, since they are managing their own money. If they want to put 50% of their capital into one name, no one is going to stop them. Moreover, they have full transparency into redemptions and inflows. I have personally have done quite well with my own investments, achieving a better return than the firm that I work at. This has only been possible because I have complete insight into my risk tolerance, and don't have management and performance fees eating into my returns. Another example. My wife's grandfather's wife in the early 2000s loved books and loved reading. Consequentially, she loved Amazon and what the company could provide for her. She convinced her husband to invest a sizeable chunk of their net worth (while not huge, was substantial, maybe 2 million) in one name, Amazon. They both dead recently, but the estate is very very valuable at this point, all because of that single Amazon investment shortly after they IPO'd. Just because there are huge players in the market, doesn't mean an individual can't compete. In fact, individuals are probably in the best position to reap the highest returns from the public markets.

ForHackernews 8y ago
The parent comment was talking about risk-adjusted returns. You're talking about inherently highly risky bets "50% of their capital into one name". I don't think it will surprise anyone that risky bets do sometimes pay off.
JohnJamesRambo 8y ago

empath75 8y ago

I think people in our line of work can easily beat the market because we know how a lot of money is being spent and is going to be spent, well before finance guys do. I made huge returns buying amazon and nvidia 5 or 6 years ago because I worked for a big tech company just beginning big moves into aws and machine learning and everyone I knew at other companies was telling me the same story. I bought amazon at $300 and nvidia at $30. When people say you can’t beat the market, I think they’re wrong in that you can be well positioned to see large amounts of money being moved around well before the market becomes aware of it, if you’re in the right position. I think you just have to think hard about how well distributed the knowledge you have is. For example— I think we all know kubernetes is going to be a big big thing and it’s only getting started— I don’t think the market as a whole knows anything about it — my only question is which companies are set to profit from it? I suspect that commodity providers are going to slowly eat away at aws’s profit margins as people move to k8s hosting. But I don’t know who is going to be the big winner yet.

berberous 8y ago
What else did you own in those 5-6 years? What was your overall performance vs. the market?
- empath75 8y ago
  Up about 350+% over all over the past 5 years even with some losers in there. I’m just picking stocks for fun and never put any more money than my initial stake. I recognize that there’s luck and risk involved. I’m just saying that if you think carefully and have access to information that’s not widely distributed, you can make money. I think one thing you have to get over is assuming that because everyone in your professional circle knows something, that everyone knows it. It can take years before disruptive change gets noticed, even while you’re working on it every day.

lettergram 8y ago

That’s actually a huge opportunity though. If you have a small edge in information, you can make millions. Undoubtedly, there can be no such thing as perfect market efficiency because information takes time (even in our interconnected age) to travel, be grok’d and then acted upon. Companies that focus on building an edge on either analytics or an edge on information gathering are where the real money is.

njarboe 8y ago
While a lot of people can acquire a lot of money by being a slightly better predictor of what the short term market thinks is the the future cash flow of public companies will be, it is a bit sad that this skill is valued so highly. So many really smart and hardworking people spend their whole lives doing it. They can end up with a lot of money, but I don't think they produce much wealth. Similar to how getting people to click on ads is really lucrative but also is more of a zero sum game than productive. Not sure how to get more people to work on more interesting things like fusion power, rocket ships, electric powered transportation, etc. instead of skimming off of zero sum transactions. Just taxing the rich at high rates also kills the few golden geese.
sytelus 8y ago
> If you have a small edge in information, you can make millions. This is one of the misnomer. Economics has enough random stuff and complexity that small edge doesn’t make huge difference. For example, you can get satellite photos of 100 sample Walmart stores and observe it’s parking lot to conclude that perhaps their quarter would end in negative side. But you might not be aware that the slack is being picked up more than enough by their online operations or that they have new deals for partnerships or some law about to be passed that taxes competition more.
- pc86 8y ago
  To be fair, if you are making huge trading decisions like this on consumer retail, and ignoring the online component of the third largest online retailer in the US, you're going to lose all your money eventually anyway.

austincheney 8y ago

Pursuit of efficiency is a common mistake. I believe, though I could be wrong, that Bridgewater concluded the only goal in investing is to make the correct choice more than 60% of the time though greater than 80% is extremely stellar. So long as you make the correct decision more than the wrong decision and account for the degree of risk you can afford to be inefficient and still outperform the competition by an order of magnitude. Sometimes it is hard to know what the right decision is when current market forces suggest you should make the wrong decision or when every decision is apparently the right decision. In those cases you need historical data to compare against. The way they describe it it isn't any different than writing a basic algorithm, except there are many more variables to consider.

ptd 8y ago

If you don't mind sharing, how did you turn your CS/Econ/Finance background into a career? Feel free to be vague, but I'm curious as to how you make a living. Thanks!

mathattack 8y ago
Started in CS, became a database programmer, went to grad school in Econ and Finance. Spent some time in Capital Markets after school, but realized I liked tech more. (I liked studying Econ and Finance more than working in that environment. The opposite of CS. Maybe I identify more with programmers than financiers?) I combined the two in Fintech as a way to get back into technology. Now I work in the business side of tech.
- ptd 8y ago
  Thanks for sharing! Hoping to follow in your footsteps, except with ds/ml instead of database. Nice to hear it’s working out for you.