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The Quants Run Wall Street Now

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Re: The Quants Run Wall Street Now

#41

Post by moxious »

jessriedel wrote: post #27

There's a plot where they differentiate "quant hedge funds" from "other hedge funds". How are they defining this? (To what extent is this just a matter of quant being sexy and more firms describing themselves as quant?)

It's about whether the computer does the analysis or not, but that's just a stand-in. The real difference is whether and idea or investment strategy can be systematized to the point where it's automated. That implies that there's no emotion or personal bias in most individual trades.

Contrast that to humans doing the picking where there's a fair amount of "lick the finger and hold it up to see which way the wind is blowing"

Re: The Quants Run Wall Street Now

#42

Post by moxious »

vowelless wrote: post #39
lisper wrote: post #28

Earlier quoted context omitted.

> the modeling required to find arbitrage or alpha does Not really. Even if everyone is just throwing darts, half of the players will beat the market, and the more players you have the more extreme the outliers will be. Of course, the converse is also true, but no one pays attention to the losers. Both Vegas and Wall Street prosper from this same principle.

> half of the players will beat the market For how long? And if it is for more than one sample (year), then how do you explain the continued success of places like Renaissance Technologies? > Both Vegas and Wall Street prosper from this same principle. I think poker is probably the closest thing in Vegas that matches Wall Street. Probably why it is so popular among quants.

There's such a thing as real alpha and also just luck. In a market with so many players, you would also expect that random chance would predict many people winning consistently year after year.

This is not to say that all such funds can be explained this way. But most of the successful ones likely yes

Re: The Quants Run Wall Street Now

#43

Post by dsacco »

lisper wrote: post #28
cheez wrote: post #26

Earlier quoted context omitted.

For the most part, execution does not require high math, but the modeling required to find arbitrage or alpha does. So for example, managing an index weight fund is simple on the face of it but when and how you choose to rebalance your portfolio can affect your drift. This is the part that requires high math. This is even more important if you're talking a billion dollar fund as opposed to a 100,000 personal account.

> the modeling required to find arbitrage or alpha does Not really. Even if everyone is just throwing darts, half of the players will beat the market, and the more players you have the more extreme the outliers will be. Of course, the converse is also true, but no one pays attention to the losers. Both Vegas and Wall Street prosper from this same principle.

Virtu only lost money trading one day out of 1278 trading days between 2009 and 2014. In the most uncharitable analysis (1278/2; or the lost day happened in the middle), they had a 0.5^639 chance of doing that.

Maybe you disagree with 0.5 per day. Let's make it 0.9!

...But that's still 5.7 x 10^-30. How many firms do we need to exist for this to emerge by chance?

This and website bug bounties being sold on the black market are my two HN crusades. I have heard darts, I have heard coin flipping; I hear all manner of analogies from people who stubbornly insist or strongly imply that consistently, purposely beating the market is infeasible in principle.

But no one ever does a modicum of analysis to support whatever trite analogy that's thrown out, they just wave their hands and exclaim, "statistics!".

So here is something actually quantifiable. If you have something quantifiable to refute my analysis of your analogy in turn, please share it by all means.

Re: The Quants Run Wall Street Now

#46

Post by tptacek »

cheez wrote: post #26
mianos wrote: post #7

They do if you think balancing an index weighed fund is high math.

For the most part, execution does not require high math, but the modeling required to find arbitrage or alpha does. So for example, managing an index weight fund is simple on the face of it but when and how you choose to rebalance your portfolio can affect your drift. This is the part that requires high math. This is even more important if you're talking a billion dollar fund as opposed to a 100,000 personal account.

What's the "high math" we're talking about here? Stochastic calculus?

Re: The Quants Run Wall Street Now

#47

Post by [deleted] »

tptacek wrote: post #46
cheez wrote: post #26

Earlier quoted context omitted.

For the most part, execution does not require high math, but the modeling required to find arbitrage or alpha does. So for example, managing an index weight fund is simple on the face of it but when and how you choose to rebalance your portfolio can affect your drift. This is the part that requires high math. This is even more important if you're talking a billion dollar fund as opposed to a 100,000 personal account.

What's the "high math" we're talking about here? Stochastic calculus?

[deleted]

Re: The Quants Run Wall Street Now

#48

Post by zackmorris »

Anyone have hard numbers on if/by how much quants outperform old fashioned techniques like flags and finding stocks that tend to go the opposite direction from the one you're interested in? I don't know the terminology for all this but I know there are limits due to uncertainty so even the best algorithms may not do much better that someone guessing. Do quants do 10% better, 2x better, 10x better?

My Dad and I had a relatively lucky streak where we doubled our money day trading Apple on margin after the September 29, 2000 dot bomb:

http://money.cnn.com/2000/09/29/markets/techwrap/

He saved quite a bit of money by being able to trade 1000 shares each time. Since the stock swung +/- 2% a couple of days a week it was pretty easy to make 2% most days, 5% on a good day. It was like a casino where the odds were 2% in your favor, with a ratchet that just sold when it was about to go down. Then you just guess the shape of the day’s heartbeat. He wouldn't even let me sell short because he felt it was unethical, so we only gained half what we could have which was agonizing to endure. I pleaded for him to get out because he was up a couple years of my wage at the time and my gut was screaming at me that something wasn't right. Then we lost all the gains the day 9/11 happened. We sold a few weeks later and ended up breaking even. Then Apple went to 500 over the next couple years with splits thrown in to boot.

I wanted to try day trading myself but they changed the law in 2001 so you had to have $25,000 to trade on margin, so only the wealthy could get twice the gains:

https://en.wikipedia.org/wiki/Pattern_day_trader

I personally don’t buy any of the standard advice about risk because it’s more risky to keep your money in a bank and only get a couple percent a year. I felt so miserable about the whole experience that I worked a bunch of dead end jobs and ran up my credit cards over the next several years. It’s heartbreaking to know how hard typical folks in the world work to make $100 a day when day trading $50,000 can easily earn $1000. But those folks don’t have $50,000 so are locked out. I guess in my heart it felt like stealing, or at the very least finding yourself in the universe where you won and thinking you somehow earned your survivor bias. So I don’t do it anymore, and I’m even hesitant to invest because politics are so volatile right now. Sorry to digress, I should have stopped at the first paragraph.

Re: The Quants Run Wall Street Now

#49

Post by SirLJ »

Everyone can try to do it, but you need to spend the time and educate yourself like in any other profession or hobby and the first step is to go to eBay and search for historical stock market data, you can buy 20 years of data for less than $100 and you can test all trading ideas for free and without losing a single penny...the barrier for entry is very low, some Python knowledge + Linux machine and the data and off you go...

Re: The Quants Run Wall Street Now

#50

Post by salesguy222 »

caminante wrote: post #17

>"In the battle for talent, quant-focused firms often are reluctant to call themselves hedge funds or even investment firms. Quant firms would rather emphasize their similarities to cutting-edge tech companies in Silicon Valley." Mirror, mirror, on the Wall [Street,] who's the [quantiest] of them all? I sense many money managers can't differentiate themselves with current ops and now want "quant headcount" as a diffe…

Haha, awesome thought that you've brought up here.

I bet we will start to see title inflation as a result as well- that is to say, it is not that more highly skilled quants will be hired, but rather run-of-the-mill employees will be branded and marketed as "quants"

I've noticed this drift everywhere:

-Sales people are now "product evangelists" or "product specialists"

-Operations employees who do accounts payable or receivable are now "Finance Analysts" (seriously)

-HR are now "Human Capital Analysts"

-And virtually everyone is now "Senior" or "Lead" or even "Manager" (of some process, not of necessarily employees)

So, I guess we shouldn't be surprised when someone fresh out of college who more or less guesses on stock picks with the firm's money and some fancy charts are now hailed as "HIGHLY SKILLED QUANTITATIVE ANALYSTS"

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