The Medallion Fund has been phenomenally successful for decades. They are being challenged for an aggressive accounting trick, but there are a lot more things contributing to their success than one accounting trick.
They have very smart people with PhDs in disciplines including NLP and cryptography inventing models to predict prices, and other very smart people refining the technology and execution. They are extremely secretive about the details of the strategies beyond that, and they probably change fairly frequently anyway. Slightly more detailed info:
While the possibility of "magic sauce" is in theory possible, its existence would suggest that it is currently possible to mathematically describe the behaviour of stock markets in such a way as to generate 35% p.a. returns by trading entirely based on this description.
A priori, this seems very unlikely.
Alternatives, such as an unusual access to information, and/or efficient use of existing laws, e.g. those surrounding taxes, are much more plausible.
The title is click-baity because we're supposed to say, "oh, there's someone old and not in hedge funds getting into it, he must have some crazy cool thing he's going to do."
Except, if he was employed by one of the top hedge fund management firms, none of that impression is true. So, click bait and misleading.
Some Hacker News "title police" who thinks it's more accurate to simply say "former hedge fund employee" is simply wrong. There are millions of former hedge fund employees.
Why can't people add real value to the conversation or say nothing? Understanding how the trading algorithms work, for example, would be interesting.
> It is Mr. Zweig’s first foray into the hedge-fund world since leaving the famously secretive and profitable quantitative hedge-fund firm Renaissance Technologies LLC in 2010. He agreed when he left not to compete against Renaissance for four years.
later,
> Mr. Zweig first turned to hedge funds as an investor while amassing a nest egg for his disabled daughter. In 2003, he interviewed for a job with East Setauket, N.Y.-based Renaissance, founded by former Cold War code breaker James Simons. Renaissance has achieved near-mythical status for the performance of its Medallion fund, which has averaged returns of more than 35% a year since the late 1980s through 2010.
> After seven years at Renaissance, where he said he developed a system that allowed the firm to trade certain instruments for the first time, Mr. Zweig signed the noncompete agreement with Renaissance. Renaissance declined to comment.
For the last 12 years he's been in the world of hedge funds. It's not like he's coming off theorizing the quark and saying "let's try this hedge thing". Indicating his expertise would have been more factual.
It would also have made the link less interesting to click on WSJ's home page. I don't fault WSJ for getting clicks, but lets call it what it is, yeah?
>Signition is a play on words including “signal” and “recognition.”
but i could not help but think of "momentum ignition", a strategy that is a little bit more sinister than what amounts to no more than statistical methods for return and risk estimation.
edit: on further thought "sigma ignition" is a rather darkly funny way to think about it too.
Click-baity headline. Yes, he's 78. Yes, he's starting a hedge fund. But he worked at Renaissance (the gold standard of hedge funds) from 2003 - 2010, and was preparing to start it for the 4 years the non-compete was in place.
Scientists starting hedge funds isn't a new phenomenon. I forget the name (kinda telling) but it was an all star team of physicists and nobel prize winners doing some triangular arbitrage (?) and then blowing up spectacularly. Apart from HFT, lot of quant or algorithm based funds never seems to last longer than the market will let them. You see successful money managers but rarely are they quant based strategists. It never made sense as to why you would need so much science in a field where investing and trading is an art half of the time. I might not be understand how quants typically work which adds to my biased thinking but we've seen many like this. Reminds me of what Warren Buffet said "It is better to be approximately right than precisely wrong."
By art you mean inside information, or who has the money--connections to get light sentences when caught--unless the government wants to really send a message? "Take it easy guys! There's not enough SEC employees to catch you, but don't be a blatant fool. Do your insider trading like your daddy did, at social functions--inconspicuously?
(Actually--I know what you're getting at. My luck in the stock market is usually so wrong, I just just decided to become a contrarian investor--when I have the money to gamble.)
Their is some science in HFT, and diversification!
I feel the next big scandal in the market will be the viewing of dataa--search engines have on on financial traders?
)They map every IP address. They know what what investment houses are searching for! I don't think I could not look at that data, and place my order?)
Janet--raise those rates. They are hurting the poor and middle class. I'm tired of no interest on my cd. I'm tired of bank fees.(those bastards will proabbly still change fees when interest rates increase?). I love the health care Obama, but this free money is only helping the 1 percent. You have helped them enough, and it's not trickling down?
I wanted to put my last few thousand on PayPal. I this it will go up. I might check it out tomorrow? (I think it will go up because of name recognition? Not becuse it's better than anyone else?). "I need to send money grandson, should I use PayPal, like I did years ago! Yes--grandma!).
I understand your skepticism but see no value in it. Throwing up your arms and saying it can't be done doesn't seem like an intelligent way to look at the problem when you consider that someone else has already shown you that it can be done.
David Shaw is a hero to all scientists that hate writing grants. The best part is that once he was done terrorizing Wall Street for 20 years, he went back to research in protein folding.
Now there is a role model for you.
Disclosure: DE Shaw paid for some of my research long ago.
What continues to amaze me is that there does not seem to be any convincing scientific evidence that predictive patterns can be found in past price movements, and yet many reputable investment firms are throwing a lot of money at this problem.
I understand that not all quantitative approaches depend on finding patterns in past prices, but some do.
I am completely undecided on this one. It baffles me. It's not like every company applying materials science also experiments with witchcraft somewhere in the basement, so what's going on here?
There are predictive short term patterns, but once the knowledge of the patterns spreads, they start to disappear. There is also constant change in long term patterns because the world outside financial market changes unexpected ways.
Financial markets are self reflecting system where people who invest are inside the the system and change it.
If you discover pattern that makes money, you must keep it secret and establish firm that tries to exploit it. If you are successful, others notice it and start to analyze your game and the edge starts to disappear. You may use machine learning to discover constantly new patterns but that does not change the situation, because others also use machine learning to detect new patterns.
Portfolio managers seeking high alpha are often poker players, because Poker and alpha seeking are very similar games.
But banks also employ technical analysts who use well known technical signals like support and resistance. Your and lumberjack's theory does not apply to them and yet they get paid.
No they don't. Technical analysis is to professional trading what astrology is to astronomy and big banks don't use them. Those books are snake oil sold to hobbyists and small time traders.
Large banks, investment management firms use completely different statistical methods.
Publicity doesn't bring much benefit to quant funds, and it can attract imitators, so you are much more likely to have heard of a successful fundamental manager than a quant manager. The article is about a guy coming from Renaissance, which is probably the most successful hedge fund in history.
because almost all the funds are doing business using money from other people. having highly sophisticated formula, models,algorithms and Ph.D from top universities is intimidatingly convincing to investors to put money in.
on the other hand, investors, most being institutional, who are hardly convinced either, nevertheless would invest. after all, it's not their money. they just need some justification.
it's business, rather than arts or science.
it reminds me of Madoff. Technically, it was a quant fund in a sense that he paid his engineers to create algorithms to falsify returns. Nobody would've known it was a scam all along apart from contrarians who immediately called bullshit on his consistent double digit returns, even through bubble busts when he is typically long.
It appears that raising money either for hedge funds or startups doesn't seem to be rooted in rationalism and caution, rather money seems to flow to those that acquire the social credits which can come in the form of academic credentials, bro-ism, and being 'a lucky sperm' for a lack of better word.
http://www.bloomberg.com/bw/articles/2013-07-03/the-irs-chal...