Hedge-fund managers that do the most research will post the best returns • Hacker News Board

Re: Hedge-fund managers that do the most research will post the best returns

#71

Post by autokatalyst » Thu, Mar 22, 2018, 4:22 PM UTC

dsacco wrote: post #29

zechs wrote: post #23

Earlier quoted context omitted.

They automated signal discovery in what kind of data? I have heard their use of unconventional data sources is the source of their success, not automated signal discovery.

No, every quantitative firm uses unconventional sources of data. That doesn't meaningfully differentiate them (at least, not anymore). For example, Two Sigma has an entire division devoted to sourcing and processing "alternative data." But Two Sigma is not at all comparable to firms like RenTec. The funds I'm talking about (including RenTec) take in as much unstructured data as they can possibly find, almost indiscri…

You mentioned these firms are typically smaller in headcount, use private capital, and generate similar returns. Any insight on how they're targeting asset capacity for their meta-strategy approach? The medallion fund, until recently was capped around 3-4 billion [1]. I wonder, if the quality and quantity of data itself, and the models built on that data, are subordinate to the data processing IP as you say, can this type of trading be done at smaller scale, either as an individual or handful of people? I've been out of the industry for a bit, but infrastructure and data costs were the main (financial) hurdles for startups, particularly in the high frequency space.

Are there any firms outside of finance using an analogous approach to data processing and signal construction?

[1] https://www.bloomberg.com/news/articles/2017-08-16/renaissan...

Re: Hedge-fund managers that do the most research will post the best returns

#72

Post by dsacco » Thu, Mar 22, 2018, 4:24 PM UTC

vanderZwan wrote: post #62

dsacco wrote: post #56

Earlier quoted context omitted.

The price of a security is, formally speaking, a (weighted) sum of many disparate data points related to the security. The more data is available about the security, the more efficiently it's priced. Individuals do not need to explicitly share information about any given security to each other for it to spread through the market, because there exists a feedback cycle between any security and the publicly available da…

Ok, so half-guessing at what you meant, wouldn't this be the crux of the problem then: > In other words, every time a security is traded, its price is updated with a very small amount of new information. The update happens after trading, so before that the price is by definition outdated, meaning it has that bit of "inefficiency" you spoke about. Hence "doing your homework" as a hedge-fund manager would in theory all…

Yes, that's mostly correct. But I'm not sure what your question is. It's not enough to have the data, you also have to have reasonable confidence in how the price will change once the information does impact the market. There's practically an eternity of information available, but you can't use all of it. You have to pick and choose. Moreover, you have to choose how much to weight any particular set of data with respect to another.

This is not to say that most hedge funds are right to ignore any given set of meaningful data. It just means that they have to make decisions about which data to use and how much they'll prioritize it. Then they have to see if they have the requisite infrastructure to trade on that information before anyone else.

Re: Hedge-fund managers that do the most research will post the best returns

#73

Post by bckygldstn » Thu, Mar 22, 2018, 4:25 PM UTC

wgerard wrote: post #33

Not surprised at all. Anecdote: A friend and I used to run a website that tracked activist short sellers and their campaigns, and published all that information as a nice centralized database basically. Hedge funds were, by far, the most interested in this - which was surprising to us, our original target audiences were auditors and legal firms. My impression from this experience is that the more successful hedge fun…

Automated data ingestion doesn't come for free. It's an ongoing effort to keep on top of new sources and schema changes, and the amount of effort scales with the number of sources.

I'd guess that's the value you were providing for them.

Re: Hedge-fund managers that do the most research will post the best returns

#74

Post by thedevil » Thu, Mar 22, 2018, 4:29 PM UTC

padobson wrote: post #65

thedevil wrote: post #47

Around 2008, I read some public filings by banks. I made only two back-of-the-napkin adjustments: 1) I combined off-balance sheet assets and liabilities into the balance sheet, and 2) I changed the expected % losses to approximately that of Wells Fargo. With those two simple adjustments, I saw that some big banks were in the hole by (combined) tens of billions of dollars. The market prices for these banks made it cle…

Are there any possible holes in the making you see now? I was curious for a while if crypto was going to pose a systemic risk, but the total market cap[0] was never really high enough. [0] https://coinmarketcap.com/

I don't know much about crypto.

I do know that 1) a payment system with transactions that take more than a few seconds and cost more than a few pennies is not a good payment system for most things. 2) I've never heard anyone talking about using crypto for anything but speculation or paying for ransomware. Even on the internet, I've mostly heard of speculation, ransomware prostitution and buying drugs. 3) Regulators don't like payment systems for ransomware, prostitution and buying drugs. 4) Assets whose prices are based on speculation eventually fall.

I could be missing something. As I said, I don't know much about crypto-currencies. Please nobody bet on my comment alone. Also, timing collapses is difficult. Bubbles can last for more than a decade.

Re: Hedge-fund managers that do the most research will post the best returns

#75

Post by wgerard » Thu, Mar 22, 2018, 4:31 PM UTC

bckygldstn wrote: post #73

wgerard wrote: post #33

Not surprised at all. Anecdote: A friend and I used to run a website that tracked activist short sellers and their campaigns, and published all that information as a nice centralized database basically. Hedge funds were, by far, the most interested in this - which was surprising to us, our original target audiences were auditors and legal firms. My impression from this experience is that the more successful hedge fun…

Automated data ingestion doesn't come for free. It's an ongoing effort to keep on top of new sources and schema changes, and the amount of effort scales with the number of sources. I'd guess that's the value you were providing for them.

Oh sure, no doubt. It makes sense to spend $10 a month on something if it saves you 10 hours of time and you can potentially make $10 million from it.

I was mostly just surprised at how quick the process was. Hedge funds are much more afraid of missing out on something than they are of paying a monthly fee to someone.

That might sound a bit silly (what business isn't afraid of missing out on something?), but that's definitely NOT the case in many other enterprise sales discussions.

Re: Hedge-fund managers that do the most research will post the best returns

#76

Post by dsacco » Thu, Mar 22, 2018, 4:32 PM UTC

thedevil wrote: post #47

Around 2008, I read some public filings by banks. I made only two back-of-the-napkin adjustments: 1) I combined off-balance sheet assets and liabilities into the balance sheet, and 2) I changed the expected % losses to approximately that of Wells Fargo. With those two simple adjustments, I saw that some big banks were in the hole by (combined) tens of billions of dollars. The market prices for these banks made it cle…

> Around 2008, I read some public filings by banks. I made only two back-of-the-napkin adjustments: 1) I combined off-balance sheet assets and liabilities into the balance sheet, and 2) I changed the expected % losses to approximately that of Wells Fargo. With those two simple adjustments, I saw that some big banks were in the hole by (combined) tens of billions of dollars.

The market prices for these banks made it clear that major investors either didn't read or didn't understand the data in the public filings.

That's impressive work, but I interpret that a little differently. There was definitely irrational exuberance going on, but plenty of major investors understood what was happening well before 2008. The reason the valuations were still out of whack is because having the correct data and the correct analysis isn't enough, you have to correctly forecast how the market will react. So there was an unfortunate feedback loop: many investors savvy enough to see the problem were not betting against it because there are far easier and more consistent ways of trading profitably.

This is why the most successful funds don't really try to replicate the process you're talking about. Their process is data and hypothesis agnostic. A lot of their work happens to align with the sort of analysis you've described here, but they don't start from the same place.

Re: Hedge-fund managers that do the most research will post the best returns

#77

Post by wgerard » Thu, Mar 22, 2018, 4:32 PM UTC

mandelbulb wrote: post #63

wgerard wrote: post #33

Not surprised at all. Anecdote: A friend and I used to run a website that tracked activist short sellers and their campaigns, and published all that information as a nice centralized database basically. Hedge funds were, by far, the most interested in this - which was surprising to us, our original target audiences were auditors and legal firms. My impression from this experience is that the more successful hedge fun…

>Not surprised at all. Neither result would be surprising, that is why this issue requires research.

Actually, there's plenty reason to be surprised here since it flies in the face of the efficient market hypothesis a bit.

Re: Hedge-fund managers that do the most research will post the best returns

#78

Post by yellowstuff » Thu, Mar 22, 2018, 4:36 PM UTC

osrec wrote: post #19

avvt4avaw wrote: post #10

Earlier quoted context omitted.

AQR are certainly not a high frequency trading firm, and Renaissance may do some high frequency trading, but they are not primarily a high frequency trading firm. Where did you get that idea? The paper explicitly addresses the point that large-scale systematic collection of public records may be indicative of the kind of fund that outperforms, rather than an indication that the public records add alpha in and of them…

Having worked with AQR, I would say they are more HF + coupled with some tend following than anything else. What makes you say they are not?

FWIW, Cliff Asness disagrees with you:

> we are not high-frequency traders

https://www.aqr.com/Insights/Perspectives/High-Frequency-Der...

Re: Hedge-fund managers that do the most research will post the best returns

#79

Post by gameswithgo » Thu, Mar 22, 2018, 4:38 PM UTC

nugget wrote: post #68

thedevil wrote: post #47

Around 2008, I read some public filings by banks. I made only two back-of-the-napkin adjustments: 1) I combined off-balance sheet assets and liabilities into the balance sheet, and 2) I changed the expected % losses to approximately that of Wells Fargo. With those two simple adjustments, I saw that some big banks were in the hole by (combined) tens of billions of dollars. The market prices for these banks made it cle…

If there were less political intervention into financial markets then solid financial analysis would win almost every time. Maybe that's the way the world should be. Since the GFC a lot of macro bets in both US and EU have been bets on political will and central bank actions. In late 2010 Bank of America was technically insolvent (based on analysis similar to yours), but the Fed went to work and backstopped the marke…

>If there were less political intervention into financial markets then solid financial analysis would win almost every time

What empirical evidence exists to support this belief?

Re: Hedge-fund managers that do the most research will post the best returns

#80

Post by dsacco » Thu, Mar 22, 2018, 4:49 PM UTC

wgerard wrote: post #77

mandelbulb wrote: post #63

Earlier quoted context omitted.

>Not surprised at all. Neither result would be surprising, that is why this issue requires research.

Actually, there's plenty reason to be surprised here since it flies in the face of the efficient market hypothesis a bit.

To be fair, that's really only surprising to people who believe the strong EMH proposition is true. EMH is demonstrably false if you casually look at the returns of various funds over timespans measured in decades. The only way you can argue it isn't false is if you bend over backwards to redefine these firms as havens for insider trading or try to claim they're plausible as mere statistical outliers.

Otherwise, the weaker postulate of EMH is sort of redundant. That's not to discredit Fama's work: we know far more now then we did back then, and it's legitimately useful as a theory of the relationship between market state and information asymmetry. But its utility has nothing to do with whether or not the market actually is efficient.