"but they manage your retirement fund", really? do they? last I checked there are algorithms running the entire show and making sure I and every other little investor get screwed for every 10th of a cent so that a few investors at the top who already have loads of money can have more. They've made a game out of moving money and skimming a bit off the top all the time. Let's not forget that they are actually taking money from your 401k every time they make these trades. Let's not pretend the financiers care about you, the little guy.
Another comment mentioned that YC is in finance, but let's be clear, YC is financing start-up businesses and helping them to grow. They're small finance. When I buy a share in Facebook, I'm not helping it grow, I'm betting on it's growth and the big finance industry is just the casino.
If the secondary market wasn't so big and efficient, it would be more expensive for everyone to raise capital, from large corporations to one man seed rounds.
https://mathbabe.org/2011/06/24/working-with-larry-summers-p...
It always costs money to transact. The alternative to trading against an ETF arbitrageur's quote isn't a costless transaction at the fair price, it's manually paying the spread and transaction costs on hundreds of stocks and risking slippage.
FWIW: YC probably earns more than even the biggest automated trading businesses.
Do you have a reference for this? It runs counter to my intuition.
The simplest description of the financial sector is that they ensure that money is invested and reinvested. In general, this is good for the economy, and helps everyone. This pays for peoples wages etc.
Let's imagine a situation without financial services. All money just sits on a bank account. That's it. No return of investment. Zippo. Nada. Now, imagine that money is reinvested - now the money flows into a company, that can use the money to hire someone... etc.
The world with finance is a much more rich and varied world than a one without finance. The fact that it plays such an important role, and that it's not immune to human fallacy, leads to the pathologies we've sadly all become familiar with.
Basically, if we look this from a historical perspective, a world without finance is a world without industrialization. That's not to say finance (or industry for that matter) is always fair.
From the perspective of the business owner it matters little of the cash comes from a bank or as an equity investment. The cash spends the same and they will prefer whichever they can get that is most favorable to them.
Even though public equities get all the news they are a relative latecomer to the party and are frankly a pimple when compared to the bond and cash market. Even if the entire public market disappeared tomorrow the vast majority of companies would have no issue raising cash either through private equity, bonds or bank loans.
Almost all (99.999999+%) trades on the public market have nothing to do with raising corporate equity (i.e. newly issued stock) and instead are transmitting price information about the markets current beliefs about potential future earnings. That is valuable in aggregate because it allows good companies with strong prospects to raise funds at a lower cost (if needed).
But is transmitting pricing information around the globe via dedicated links to shave off tenths of seconds really necessary? Does any company need to raise funds at a micro-seconds notice?
After all the markets close at the end of the day but somehow the world continues to function for the next 16 hours without sub-second pricing information at everyone's fingertips.
Sure they were originally doing something of value with that, but now days they're just trying to make people more addicted.
I first started working in finance because it was one of the few industries that paid engineers a fair salary without trying to trick us with monopoly money.
Of course, the world has changed and now tech companies are doing the same.
I genuinely want to know what you think the good you did for the world is in investment/trading. I really don't believe that the amount of money the financial industry is making is commensurate with its value provided to society.
It's how our brains are wired to work. It's how we sleep at night.
edited to add: which is to say, you may have; I don't know you or what you do. But I think the point I made is important when discussing such things.
Additionally at least in theory they do help allocating capital to better uses which has giant leverage effects on the economy as a whole. I'd argue more efficient capital allocation and innovation (in the Schumpeterian sense) are both very valuable. I couldn't make a value judgment of what's more valuable tbh
The housing market is very illiquid—it's much harder to buy or sell a home than to rent a place to stay for the night. In the context of gentrification, though, this seems to benefit the preexisting landowners: the difficulty of moving provides downward pressure on supply, increasing prices, and also makes it less likely that longtime residents will sell before prices peak.
But, as a thought experiment, imagine if there was perfect liquidity: you could buy and sell a house at any time at the click of a button with ready financing and (somehow) free moving services, etc.
If that were true, many more residents would sell much earlier in the gentrification wave, to slightly richer people, who would sell to people slightly richer than that. This would result in the original landowners only getting a tiny fraction of the peak land value, and most of the returns going to the richest people.
This makes me wonder if this isn't generally true: that high liquidity primarily benefits the capital class at the expense of small asset holders.
There's probably also a corollary about late stage VCs here somewhere.
Or stayed in science and advanced knowledge without having economic returns in mind.
A one minute interval seems appropriate. Plenty real-time enough to deal with most real world events and needs, while eliminating arbitrage based upon momentary, naval-gazing analysis.
Markets already belie the trope of an (entirely) "free market." At least level the playing field between moneyed quants and the rest of the world.
If you saw someone selling a brick of gold for a dollar, wouldn't you buy it to resell it?
Imagine reading a newspaper in 1840 reporting on a group of scientists who are making a killing in cotton because they figured out, using statistics Moneyball style, how to maximize profits by buying slaves that nobody else wants. Imagine the article tells it as a story of smart guys who amazingly did what no one else could do, with nary a comment or even awareness about the evil of slavery.
Now there are good things that capitalism and markets do, but the way it's currently functioning no longer provides those benefits, because algorithmic trading has driven the signal to noise ratio in to bedrock.
Wall St at this point is basically just a social noise amplifier stuck in an ugly feedback dynamic with the rest of the country.
We long ago stopped hearing music from the underlying economy, we're on to mic static screaming at full volume.
If I could wave my magic wand, Id switch to a single exchange which resolves all outstanding bids/orders once every 10 seconds in a single transaction. (You could create a single virtual exchange out of many actual ones using smart contracts.)
I just don't believe Wall St would stop generating any real value by being forced to slow down and take a breath (and allow humans to act on relevant time scales). Instead, we have a noise amplification arms race.
You walk into a grill bar, like my parents' place. You give them money and they give you a burger.
Apart from the various taxes, how has society benefitted?
In the grill bar example, the rest of society has received a lot of tasty burgers and pleasant dinner experiences. Where is the $55bn-sized beneficial service that the rest of stock market has received from Medallion?
Curious who and what types of jobs make the cut.
1. Does it make sense that four hedge fund guys got more money than all the kindergarten teachers in America combined? [1] (I used the word "got" instead of earned because "earned" presumes an answer.)
2. Does it make sense that Zuckerberg is worth tens of billions and Albert Einstein maybe had a net worth of one million at death? Or that Einstein earned a modest professor's salary for his enormous contributions to science, but his estate earns $10-12 million on royalties for his name and likeness (photo, Baby Einstein license, etc)?
You can't answer that it makes sense because that is what the market determined, because that would be begging the question (whether the market reasonably and fairly compensates people).
--
[1] http://www.vox.com/2014/5/6/5688794/these-four-hedge-fund-gu...
[1] https://en.wikipedia.org/wiki/Robert_Mercer_(businessman)
There are billionaires who do more useful things than just buying more houses, planes, etc. E.g. Bill Gates, Elon Musk, etc.
Perhaps a parody of modern ads put in the context of 1830 southern America.
IBM: outthink slave rebellions before they even happen.
Apple: ichain. Manage your slaves without even leaving your Manor.
Whether it is an appropriate analogy depends on whether you think it obscene that they make so much, especially for what they do. See my other comment: https://news.ycombinator.com/item?id=13034873
Something smells fishy.
The limiting factor behind what they do is that it doesn't scale.
> How did these guys make 98.5% in 2000 and 33% in 2001 in the depths of the .com collapse of Wall Street?
The name "hedge fund" comes from the concept of a hedge; a strategy that will underperform in good times, but over perform in bad ones. 2001 is the exact time you'd expect a hedge fund to do well, especially one focused on dispassionate data analysis.
It's also how profitable sports betting syndicates work. Lots of small bets with relatively low expected value. 1% expected return per week is 70% return in a year. You can't scale the syndicate above certain limit.
1) They are not scalable (for each such strategy, market turnover capacity is very limited, and increasing it requires coordinated efforts of many smart people). This is the reason they are not taking additional investments and strictly invite-only.
2) Operations efficiency becomes the key. Execution capability has to be consistently at top of the market, and margin for error becomes nearly nonexistent. It is very easy to screw things up. Hence the need for top technical and engineering talent.
However making money in those two years is nothing unusual.
In addition, market turmoil is when trading shops make the most money.
(I work in the industry.)
The only way they're making money like this is by cheating the system. I highly suspect they're using their public funds to feed data into their private one in order to siphon off profits. It's like a pyramid scheme except the mechanism of moving money is a form of market manipulation and this article is playing right into their hands by making them sound like geniuses ("it's all scientists!"). Clearly, if this business is run by "smart people" (scientists) then their other two funds--which are actually accessible--must be promising! Right!?
TL;DR: The investors in the public funds are likely being scammed.
I believe they keep that fund private because the risk factors must be through the roof. And frankly, they don't need that external money to make a ton of more money.
Do they have low latency, very fast computers, yes. Is it what's making the difference, no, I don't think so. It's the models they use to assess and predict - current and future moves - that makes the real difference.
I think the real reason is that the main fund can't manage more money.
If I manage to figure out that Company A is overvalued compared to Company B, and I short Company A in order to buy stock in Company B then by doing so, in a simple supply-and-demand model... Company A's stock will go down very slightly (because I shorted them), and Company B's stock will go up slightly (because I bought their stock).
A higher stock value helps a company - they can sell some of their own stock in order to raise more funds. Therefore, the value I've provided is I've made a calculated decision that the economy should be spending more on (for example) robotics and less on coal because robotics companies are going to more successful, and coal less successful.
Allocating funds to the more profitable companies and industries is one of the strengths of the market economy - it adds efficiency.
Price-finding in general adds value. Also market liquidity adds value. I wouldn't discount what these people do, even if they are narcissistic selfish assholes as a breed.
Frustrating how a single bit of information can alter the course of one's life.
I received an offer from Two Sigma, then failed the background check because of something seven years earlier.
If I had known just how much that event would end up costing me.
We're lucky to even have heard of them.
RT started off as a CTA. If you look at CTAs a good Sharpe is something like 1-1.25. You can buy a book that will get you most of the way there, and it's really simple (Author Andreas Clenow, I forget the title). I have actually verified this myself, coding it up in Python.
If you simulate a random walk that has a sharpe of 1, you'll find there's plenty of periods where it's down or sideways. So you need investors. They have to pay you management fees so that you can run the thing while it doesn't make money.
Simons then changed tack. In the early 1990s the fund industry was very different. Most funds were discretionary funds where the boss decided what to punt on, and investors were used to trusting them to do so. So changing tack to another systematic strategy, in equities, could be sold to the investors.
Now this is significant, because there's a lot more stuff you can do with equities. There's industry structure, there's individual company information, there's analyst predictions for each firm, each firm has its own price series, there's corporate actions, and so on for thousands of stocks. Contrast that with CTAs where you have a couple dozen liquid things, maybe 40, in a few categories (bonds, equities, commodities, FX).
If you find a strategy that works for a commodity and it gives you some Sharpe, maybe 0.1, and we assume for simplicity they are uncorrelated (which they aren't!), you can roughly sum them up to sqrt(n). So there's a big difference between 40 and say 2000. This is just a vignette, don't take it literally. But the point is you can find strategies that in aggregate are much better in the equities space. Purely my opinion, I don't often talk to people about this, so no feedback other that my collaborators.
So back to the story, Simons builds this thing and it starts printing money. Now he's insanely rich, and the thing never loses money. So what does he need investors for? They are getting a free ride until the fund hits capacity.
Now if he had just gone straight to the Medallion fund, the thinking is the same. Why on earth would he need investors? If he didn't need investors, why would he have his name out there? He wouldn't, and neither would anyone who'd discovered anything similar. There's probably a few groups like that out there. They're unlikely to have built out the capacity, because they never became hedge funds. But I'm thinking they're out there.
https://www.amazon.com/Following-Trend-Diversified-Managed-F...
Pardon my ignorance but what is a CTA?
The learning code is not steep - you can really move up the ranks with simple improvements. I've had a great time.
If you explicitly want to move into deep learning, I'd start with Python, since it has excellent math libraries (pandas/scipy) and neural libraries (keras).
Wow.
It's amusing to imagine what the people at the fund told the journalist which ended up being turned into that.
A perfect example of the "noisy channel" idea in information theory.
https://en.wikipedia.org/wiki/Long-Term_Capital_Management
> Initially successful with annualized return of over 21% (after fees) in its first year, 43% in the second year and 41% in the third year, in 1998 it lost $4.6 billion in less than four months following the 1997 Asian financial crisis and 1998 Russian financial crisis requiring financial intervention by the Federal Reserve, with the fund liquidating and dissolving in early 2000.
Perhaps a model that takes in past quarterly reports, commodity prices, executive performances and news regarding a company and calculates 'tones' surrounding a company.
(for example appearance of 'good performance', 'meeting targets', 'vast improvements' would possibly yield a positive tone where as 'disappointing returns', 'failed endeavours' etc would yield negative). Then gauge past price sensitivities to various tones and see if there is any way to train the machine to speculate merely on these 'tones'.
> Eventually the scientists went so far as to develop an in-house programming language for their models rather than settle for a numbercentric option such as ASCII, which was popular at the time.
I might be missing something obvious, but this makes no sense to me. ASCII is not a programming language. And although UTF8 has taken over, I think ASCII is still very common.
> (To this day the company’s website, rentec.com, looks like it dates from the Netscape era.)
That's not very fair. I think the design is quite modern and minimalistic, and the website has definitely had some recent updates. It uses jQuery 1.11.3, which was released last year.
> When the bill came, they would pull out a special calculator that could generate random numbers. Whoever produced the higher number picked up the tab.
I can't figure out why the author decided to include this anecdote. I also can't figure out why the scientists didn't just flip a coin.
Another random thought: It's interesting to think that whenever I've bought or sold some stock in the past, that little piece of data has made it's way through all of their millions of lines of code, and all of their neural networks. They might have even made a few fractions of a cent based on my behavior.
> By studying cloud cover data, they found a correlation between sunny days and rising markets from New York to Tokyo.
Wow. That's incredibly interesting, and that's just one example. Alright, their code has probably read all of my tweets, too. And everything else I post about online. Especially on all the subreddits for investments and stocks.
> I don’t know, like 90 Ph.D.s in math and physics, who just sit there looking for these signals all day long.
Oh geez. Yeah, they're looking at everything. Traffic, Yelp reviews, Pokemon Go, Netflix ratings, flight delays. I don't know, maybe even newspaper horoscopes. Maybe the newspaper prints something that says Virgos are going to get lucky with an investment. And then they watch all of the online activity of all the virgo investors who still read newspapers.
Oh. And all of those companies selling your data? They're buying that, too.
This sounds like a fascinating place to work. I want to know some of their secrets.
One more random thought: They knew Donald Trump was going to win. I guarantee it. And they probably made a ton of money on all those stocks that went up.
Edit: They are capped and take out profits...so I wonder if the cap is the magic or if they use better algorithms for their private fund (only natural since it's their own money). They would have the same inputs (their data sets, infrastructure, programming language etc.) so I wonder if they have two very different models (<=10 billion and >10 billion) or how those are linked.
I think his name is Jim Simmons, was this intentional?
And as for 'super smart people', I'd just say quants in general are 'super smart' at the very narrowest of mathematical problem sets, but shouldn't be let within a mile of a compiler. And they shouldn't be invited to parties either.
[1] http://www.businessinsider.com/bob-mercer-peter-brown-2010-3
Why cap the size? What this means is usually whatever strategies RenTec employees are using in their Medallion fund likely do not work at larger dollar amounts.
Even worse, attempting to run a quant strategy above its size constraint can break it (this includes exposing too much about it to others). This would lead to it not ever working again even if they went back to only using small amounts.
if it aint broke, dont break it.
I was fresh out of school and flubbed the interview, but will never forget the experience. All they told me was, I would work around the clock, but if I came and did my job I would likely make a mint.
What could possibly go wrong?
