8 ms·

Hedge fund robots crushed human rivals in 2014

66 points by anacleto 12y ago

anigbrowl 12y ago
These are interesting links, but 15 submissions in 15 minutes is way overdoing it.
- leppr 12y ago
  See that's why humans won't last long, can't even compute a little 7311 word data stream in 900 seconds. So invest in robots, ok? Robots are disruptive and future.
pcrh 12y ago
But do the robots get bonuses...? I think not.
- valdiorn 12y ago
  the people who build the "robots" (Algorithms, or trading systems are a more applicable name) do.
  - pcrh 12y ago
    Quite. So it isn't really robots versus humans, but one algorithm versus another, the humans are using a method too.
pfortuny 12y ago
So apart from the first 6, they did as the DOW or less, which is not so impressive. Or is it?
- valdiorn 12y ago
  depends on the sharpe ratio. You can flip a coin every year. Heads; double your money, tails; lose your bet. You can easily win 3 years in a row (12.5% chance), but getting 800% return on that risk is literally worthless in the long run, as the chance of winning or losing is equal.
  - pfortuny 12y ago
    What I meant is... Those 'huge benefits of algorithmic hedge funds' depend on the number of algorithmic hedge funds: if there are enough of them, you will probably get some with outstanding results every year, won't you?
dualogy 12y ago
Overheard just earlier: "Financial markets used to be about getting money into productive enterprises, not out of them" Right on. Let all the leveraged bots and algos devour each other. Sooner or later "real economy" will decouple anyway. And with the savings of millions of individuals, pension funds and insurance corporations ping-ponging between botnets, the real "hedge" will be to remain liquid and competetive outside this hodgepodge when it all inevitably ends up belly-up.
- kbody 12y ago
  I can imagine in the future there may be a time where like the vinyls, "hipster" entrepreneurs et al. will try to create a bot-free stock exchange, because stock exchanges do have great value for businesses if not messed with meaningless profiteering.
  - CmonDev 12y ago
    That would have to be a pit with shouting and hand waving then. No computers.
    - bsdpython 12y ago
      You could enforce it in other ways. Require a longer holding period or even plain increasing the transaction fees would knock out high frequency trading.
      - NickPollard 12y ago
        To address this complete non-sequitur: Why the hell do you want to stop HFT? I have never heard a single good argument against HFT. HFT does not make ridiculous amounts of money these days - and the money it does make is at the expense of large institutional investors - e.g. Goldman Sachs, JP Morgan, et al. Are you so worried that a bunch of clever young mathematicians are taking money away from those poor old put-upon Morganites? Oh how dreadful. HFT means tighter spreads, which means cheaper and more efficient trading for everyone - i.e. your individual workers investing their 401ks, and so forth. People's arguments against HFT seem to normally come up to '...because computers!' Do yourself a favour and read this: https://scottlocklin.wordpress.com/2014/04/04/michael-lewis-shilling-for-the-buyside/ https://scottlocklin.wordpress.com/2014/04/04/michael-lewis-...
gchokov 12y ago
"Nothing new under the sun" as we are used to say. Think is.. what will happen when even the small companies have enough processing powers and knowledge to implement such system. What value would any currency have. Scary to think...
minimax 12y ago
So-called managed futures funds — which trade the futures contracts of stocks, bonds, currencies and commodities — gained an average of 15.2 percent last year, according to Societe Generale unit Newedge. This probably isn't obvious to people outside of the trading world, but Newedge is a massive futures broker. This article is basically a puff piece quoting a big futures broker telling you how great it is to trade futures. I wouldn't read too much more into it than that.
- _sword 12y ago
  It's reported by CNBC, which almost exclusively puts out puff opinion pieces when its not reporting financial results.
bsdpython 12y ago
"The biggest gains came at funds that practiced a "trend following" strategy. Those managers—who use computer models to bet on price movements in either direction and often perform best when clear patterns emerge over several months" This is headed for 2008 all over again because we've learned nothing. These algorithms rack up consistent wins for years on end, the markets rise and rise, everyone gets bonuses and all is great. Then the market turns on a dime, all the computer algorithms break at once because chaos theory takes over and your trend algorithms are useless. Liquidity disappears in an instant and the the federal reserve steps in and gives away free money to the banks until the banks become solvent again. This will continue until the parasite kills the host.
- murbard2 12y ago
  Nice story, except the 2008 crisis happened in subprime mortgages backed securities, for which there were no such strategies. What you're describing sounds a bit more like the 1987 crash, which was linked to portfolio insurance strategies, which have far more insidious consequences than trend following (and have since then been deprecated).
  - bsdpython 12y ago
    Replace "stock market" with "MBS/CDO type derivatives" and "computer trading algorithms" with "risk models" and you will see the similarities. I probably should have been more clear but the idea is that all of the financial markets work basically the same way: find a trend, abstract it with algorithms/risk models, exploit that trend and then walk away when the trend inevitably breaks. Every 10 years we keep having "10,000 year floods" according to the latest whiz-bang model/algorithm. It's all the same thing in a different variety.
    - murbard2 12y ago
      There was no trend in MBS. What you had was - a regulatory environment encouraging subprime loans - high yielding securities which were rated as AAA (by a legal oligopoly of bond rating agencies) and thus could be used for bank reserves - a short term interest rate that did not respond to market pressure (because determined by the fed) and thus created a gigantic carry trade Mistakes in risk models always happen, and they can be caused by many things, including an over-reliance on mathematical model. However, for a real catastrophe, you need to remove all the feedback mechanisms such as - a free market that would allow the short rate to rise with increased demand - a free market that would allow bond rating agencies to compete - a free market that would allow bank to compete for balance sheet quality rather than having a government insurance scheme creating a race to the bottom
xyby 12y ago
"...beating most gut-driven human managers and dramatically recovering most of their losses from 2011, 2012 and 2013..." http://xkcd.com/904/ http://xkcd.com/904/
spot 12y ago
Two Sigma is hiring javascript developers to build open source research systems (the tools used by the quants to build the AIs): http://beakernotebook.com/careers http://beakernotebook.com/careers
n72 12y ago
So they "crushed" other hedge funds? They returned 15.2%(1). You know what, boring old VTSAX returned 12.6%(2). Given the risk involved, VTSAX was a much better play. Ugh, hedge funds are suuuuuuuch a rip off. (1) Don't know if this includes fees (2) Don't know if this includes dividends
- chrisgd 12y ago
  I would guess the 15.2% does not include fees and the 12.6% does not include dividends. Probably even closer after that.
_benedict 12y ago
Trend following futures models typically have a very high variance in returns, so yielding above market returns in 1 year out of 4 is not significant or meaningful.

66 points by anacleto 12y ago

anigbrowl 12y ago

These are interesting links, but 15 submissions in 15 minutes is way overdoing it.

leppr 12y ago
See that's why humans won't last long, can't even compute a little 7311 word data stream in 900 seconds. So invest in robots, ok? Robots are disruptive and future.

pcrh 12y ago

But do the robots get bonuses...? I think not.

valdiorn 12y ago
the people who build the "robots" (Algorithms, or trading systems are a more applicable name) do.
- pcrh 12y ago
  Quite. So it isn't really robots versus humans, but one algorithm versus another, the humans are using a method too.

pfortuny 12y ago

So apart from the first 6, they did as the DOW or less, which is not so impressive. Or is it?

valdiorn 12y ago
depends on the sharpe ratio. You can flip a coin every year. Heads; double your money, tails; lose your bet. You can easily win 3 years in a row (12.5% chance), but getting 800% return on that risk is literally worthless in the long run, as the chance of winning or losing is equal.
- pfortuny 12y ago
  What I meant is... Those 'huge benefits of algorithmic hedge funds' depend on the number of algorithmic hedge funds: if there are enough of them, you will probably get some with outstanding results every year, won't you?

dualogy 12y ago

Overheard just earlier: "Financial markets used to be about getting money into productive enterprises, not out of them" Right on. Let all the leveraged bots and algos devour each other. Sooner or later "real economy" will decouple anyway. And with the savings of millions of individuals, pension funds and insurance corporations ping-ponging between botnets, the real "hedge" will be to remain liquid and competetive outside this hodgepodge when it all inevitably ends up belly-up.

kbody 12y ago
I can imagine in the future there may be a time where like the vinyls, "hipster" entrepreneurs et al. will try to create a bot-free stock exchange, because stock exchanges do have great value for businesses if not messed with meaningless profiteering.
- CmonDev 12y ago
  That would have to be a pit with shouting and hand waving then. No computers.
  - bsdpython 12y ago
    You could enforce it in other ways. Require a longer holding period or even plain increasing the transaction fees would knock out high frequency trading.
    - NickPollard 12y ago
      To address this complete non-sequitur: Why the hell do you want to stop HFT? I have never heard a single good argument against HFT. HFT does not make ridiculous amounts of money these days - and the money it does make is at the expense of large institutional investors - e.g. Goldman Sachs, JP Morgan, et al. Are you so worried that a bunch of clever young mathematicians are taking money away from those poor old put-upon Morganites? Oh how dreadful. HFT means tighter spreads, which means cheaper and more efficient trading for everyone - i.e. your individual workers investing their 401ks, and so forth. People's arguments against HFT seem to normally come up to '...because computers!' Do yourself a favour and read this: https://scottlocklin.wordpress.com/2014/04/04/michael-lewis-shilling-for-the-buyside/ https://scottlocklin.wordpress.com/2014/04/04/michael-lewis-...

gchokov 12y ago

"Nothing new under the sun" as we are used to say. Think is.. what will happen when even the small companies have enough processing powers and knowledge to implement such system. What value would any currency have. Scary to think...

minimax 12y ago

So-called managed futures funds — which trade the futures contracts of stocks, bonds, currencies and commodities — gained an average of 15.2 percent last year, according to Societe Generale unit Newedge. This probably isn't obvious to people outside of the trading world, but Newedge is a massive futures broker. This article is basically a puff piece quoting a big futures broker telling you how great it is to trade futures. I wouldn't read too much more into it than that.

_sword 12y ago
It's reported by CNBC, which almost exclusively puts out puff opinion pieces when its not reporting financial results.

bsdpython 12y ago

"The biggest gains came at funds that practiced a "trend following" strategy. Those managers—who use computer models to bet on price movements in either direction and often perform best when clear patterns emerge over several months" This is headed for 2008 all over again because we've learned nothing. These algorithms rack up consistent wins for years on end, the markets rise and rise, everyone gets bonuses and all is great. Then the market turns on a dime, all the computer algorithms break at once because chaos theory takes over and your trend algorithms are useless. Liquidity disappears in an instant and the the federal reserve steps in and gives away free money to the banks until the banks become solvent again. This will continue until the parasite kills the host.

murbard2 12y ago
Nice story, except the 2008 crisis happened in subprime mortgages backed securities, for which there were no such strategies. What you're describing sounds a bit more like the 1987 crash, which was linked to portfolio insurance strategies, which have far more insidious consequences than trend following (and have since then been deprecated).
- bsdpython 12y ago
  Replace "stock market" with "MBS/CDO type derivatives" and "computer trading algorithms" with "risk models" and you will see the similarities. I probably should have been more clear but the idea is that all of the financial markets work basically the same way: find a trend, abstract it with algorithms/risk models, exploit that trend and then walk away when the trend inevitably breaks. Every 10 years we keep having "10,000 year floods" according to the latest whiz-bang model/algorithm. It's all the same thing in a different variety.
  - murbard2 12y ago
    There was no trend in MBS. What you had was - a regulatory environment encouraging subprime loans - high yielding securities which were rated as AAA (by a legal oligopoly of bond rating agencies) and thus could be used for bank reserves - a short term interest rate that did not respond to market pressure (because determined by the fed) and thus created a gigantic carry trade Mistakes in risk models always happen, and they can be caused by many things, including an over-reliance on mathematical model. However, for a real catastrophe, you need to remove all the feedback mechanisms such as - a free market that would allow the short rate to rise with increased demand - a free market that would allow bond rating agencies to compete - a free market that would allow bank to compete for balance sheet quality rather than having a government insurance scheme creating a race to the bottom

xyby 12y ago

"...beating most gut-driven human managers and dramatically recovering most of their losses from 2011, 2012 and 2013..." http://xkcd.com/904/ http://xkcd.com/904/

spot 12y ago

Two Sigma is hiring javascript developers to build open source research systems (the tools used by the quants to build the AIs): http://beakernotebook.com/careers http://beakernotebook.com/careers

n72 12y ago

So they "crushed" other hedge funds? They returned 15.2%(1). You know what, boring old VTSAX returned 12.6%(2). Given the risk involved, VTSAX was a much better play. Ugh, hedge funds are suuuuuuuch a rip off. (1) Don't know if this includes fees (2) Don't know if this includes dividends

chrisgd 12y ago
I would guess the 15.2% does not include fees and the 12.6% does not include dividends. Probably even closer after that.

_benedict 12y ago

Trend following futures models typically have a very high variance in returns, so yielding above market returns in 1 year out of 4 is not significant or meaningful.