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Hedge Fund Uses Algae to Reap 21% Return

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Re: Hedge Fund Uses Algae to Reap 21% Return

#51

Post by Bartweiss »

Moshe_Silnorin wrote: post #39
habosa wrote: post #4

In the chart, this is how the fund has compared to an S&P index over the past 5 years: * 2013 - 5% over * 2014 - 15% under (and negative overall) * 2015 - 30% over * 2016 - 10% over * 2017 - About even One exceptionally strong year, and pretty uneven otherwise. Hardly proof that these biology-derived algorithms are the secret to market-beating returns.

Also the selection effect of us just being aware of it.

It seems like you could probably insure some great press coverage by starting several funds with wild-ass prediction mechanisms that don't change much. As long as you pick enough investments to roughly mirror the market, you can spin all the winners as incredible breakthrough techniques.

Re: Hedge Fund Uses Algae to Reap 21% Return

#52

Post by Bartweiss »

makmanalp wrote: post #30
platz wrote: post #13

Was disappointed because title is misleading; I had hoped the fund was using actual Algae (i.e. computation in biological medium) to produce market decisions. Instead it is just biologists that are creating algos with their existing machine-learning knowledge. Apparently deep-learning and algae are the same thing.

I was hoping that it like that situation when Caligula replaced a senator with a horse, but rather the hedge fund replaced quants with algae :-)

Didn't the monkey win when they tried that instead?

I'm holding out for a 4-way contest of quant, horse, monkey, and algae. I won't be betting on the winner, either.

Re: Hedge Fund Uses Algae to Reap 21% Return

#53

Post by gnaritas »

zeteo wrote: post #23
habosa wrote: post #4

In the chart, this is how the fund has compared to an S&P index over the past 5 years: * 2013 - 5% over * 2014 - 15% under (and negative overall) * 2015 - 30% over * 2016 - 10% over * 2017 - About even One exceptionally strong year, and pretty uneven otherwise. Hardly proof that these biology-derived algorithms are the secret to market-beating returns.

Also there's a question of how many new hedge funds are using machine learning. If you have enough different attempts, one of them will beat the market by sheer game of chance. Picking out their specific quirks afterwards (algae etc.) is just survivor bias.

The whole industry is based on investors not understanding survivor bias and quite often traders not understanding hindsight bias.

Re: Hedge Fund Uses Algae to Reap 21% Return

#54

Post by dsacco »

redroot9 wrote: post #26
frgtpsswrdlame wrote: post #12

Here's the important part of the article: There are skeptics, too. Emanuel Derman, who was among the first physicists to work on Wall Street, doubts that biologists possess secret sauce for investing. Derman rose to lead the quant risk strategies group in his 17 years at Goldman Sachs Group Inc. He found that as physicists applied their expertise of the laws of motion, atoms and mathematics to investing, their models…

This is essentially a certain type of cognitive bias I think (halo effect?), where people take someone's high skill or talent in one area and assume it carries to another field. For example, assuming a chess grandmaster will be good at business strategy, or a great mathematician an automatically great engineer. These examples are convaluted but anecdotally I've seen it in action in recruiting. Also 'the map is not th…

I don't think the cognitive bias you're describing matches this scenario very well, because that bias appears to result when people don't acknowledge specialization versus overall intelligence.

Your first example seems like it maps well to that cognitive bias - someone assumes that a chess grandmaster has catch-all capability because they demonstrated expertise in one area, and then they flare out in an orthogonal area.

Mathematics and engineering (at least, computer science) overlap in many areas. If someone excels at mathematics it doesn't prove that they'd be good at programming, but I'd bet a significant amount of money that the mean mathematics major is more capable of programming than the mean population in general. If that holds, there's no bias in trying to cross-pollinate expertise, even if it ultimately doesn't work out.

A lot of the work that occurs in finance is legitimate mathematics and has very close ties to physics. The heat equation is directly used in Black-Scholes; securities can be modeled as stochastic processes, which means that much of the models that apply to Brownian motion also apply to them. Outside of quantitative derivatives pricing (and more recently), hedge funds can apply the same scientific computing techniques used by physicists and computational biologists to analyze vast amounts of data (more than they know what to do with).

Re: Hedge Fund Uses Algae to Reap 21% Return

#55

Post by dsacco »

Bartweiss wrote: post #51
Moshe_Silnorin wrote: post #39

Earlier quoted context omitted.

Also the selection effect of us just being aware of it.

It seems like you could probably insure some great press coverage by starting several funds with wild-ass prediction mechanisms that don't change much. As long as you pick enough investments to roughly mirror the market, you can spin all the winners as incredible breakthrough techniques.

If the winning techniques continue to generate greater risk-adjusted returns than the market for a significant amount of time, you haven't really bypassed the whole, "finding alpha" bit. Unless of course you've spun up a truly absurd number of funds, but I'd find that harder to believe than just beating the market in the first place given the capital requirements.

"Fuzzing" for alpha that way would be really inefficient.

Re: Hedge Fund Uses Algae to Reap 21% Return

#56

Post by dsacco »

zeteo wrote: post #23
habosa wrote: post #4

In the chart, this is how the fund has compared to an S&P index over the past 5 years: * 2013 - 5% over * 2014 - 15% under (and negative overall) * 2015 - 30% over * 2016 - 10% over * 2017 - About even One exceptionally strong year, and pretty uneven otherwise. Hardly proof that these biology-derived algorithms are the secret to market-beating returns.

Also there's a question of how many new hedge funds are using machine learning. If you have enough different attempts, one of them will beat the market by sheer game of chance. Picking out their specific quirks afterwards (algae etc.) is just survivor bias.

> If you have enough different attempts, one of them will beat the market by sheer game of chance.

How do you define an "attempt", and how many "attempts" do you need to beat the market (consistently) by chance?

Re: Hedge Fund Uses Algae to Reap 21% Return

#57

Post by dsacco »

computerex wrote: post #2

A 3 year sample does not prove anything.

Not if you group all trading events into single data points by year it doesn't, but that's a silly way of analyzing them if you have extraordinary performance consistency on a day by day (or trade by trade!) basis.

Re: Hedge Fund Uses Algae to Reap 21% Return

#58

Post by Karissa44 »

dsacco wrote: post #55
Bartweiss wrote: post #51

Earlier quoted context omitted.

It seems like you could probably insure some great press coverage by starting several funds with wild-ass prediction mechanisms that don't change much. As long as you pick enough investments to roughly mirror the market, you can spin all the winners as incredible breakthrough techniques.

If the winning techniques continue to generate greater risk-adjusted returns than the market for a significant amount of time, you haven't really bypassed the whole, "finding alpha" bit. Unless of course you've spun up a truly absurd number of funds, but I'd find that harder to believe than just beating the market in the first place given the capital requirements. "Fuzzing" for alpha that way would be really ineffici…

like Curtis said I can't believe that any body can make $8668 in one month on the internet . > Open this >>>>>>>>>>>http://ow.ly/iBXm30dNtIZ

Re: Hedge Fund Uses Algae to Reap 21% Return

#59

Post by pvitz »

l5870uoo9y wrote: post #31

> In John Bogle's “The Little Book of Common Sense Investing,” he notes that the average U.S. equity fund compounded at 10 percent from 1980 through 2005, while the Vanguard 500 Index Fund made 12.3 percent. Actively managed funds did worse than average, not better as the brokers would have you believe.[1] Lets see how it performs longer term (10 year period). [1]: http://paulmerriman.com/10-reasons-brokers-dont-like…

See also [1]. Let's have a look at him again in 7 years.

[1] https://www.ft.com/content/e555d83a-ed28-11e5-888e-2eadd5fbc...

Re: Hedge Fund Uses Algae to Reap 21% Return

#60

Post by zeteo »

dsacco wrote: post #56
zeteo wrote: post #23

Earlier quoted context omitted.

Also there's a question of how many new hedge funds are using machine learning. If you have enough different attempts, one of them will beat the market by sheer game of chance. Picking out their specific quirks afterwards (algae etc.) is just survivor bias.

> If you have enough different attempts, one of them will beat the market by sheer game of chance. How do you define an "attempt", and how many "attempts" do you need to beat the market (consistently) by chance?

Get 25 monkeys to throw darts at S&P 500 stock symbols on January 1st of each year. The chance that at least one monkey outperforms 5 years in a row is about 55%. (The target areas need to be proportional to market capitalization etc.)
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