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posted by on Wednesday May 24 2017, @07:32AM   Printer-friendly
from the algorithms-Я-us dept.

According to the Wall Street Journal (non-paywalled version), hedge funds run by quantitative analysts ("quants"), some of whom are utilizing supercomputers, are now dominating stock trading:

In case you didn't know, The Quants Run Wall Street Now, or so says a headline in today's Wall Street Journal. Quant-run hedge funds now control the largest share (27 percent) of stock trading of any investor type, according to the article. That's up from 2010 when quant-based trading was tied with bank trades for the bottom share. Algorithm-based trading is, of course, the 'sine qua non' of hedge funds and has helped lift them to the top of the investing crowd. [...]

Guggenheim Partners LLC built what it calls a "supercomputing cluster" for $1 million at the Lawrence Berkeley National Laboratory in California to help crunch numbers for Guggenheim's quant investment funds, says Marcos Lopez de Prado, a Guggenheim senior managing director. Electricity for the computers costs another $1 million a year.


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  • (Score: 3, Interesting) by KilroySmith on Wednesday May 24 2017, @07:54AM (7 children)

    by KilroySmith (2113) on Wednesday May 24 2017, @07:54AM (#514717)

    And how many of these Quant funds have shown an ability to outperform the S&P 500 index, or perhaps the Nasdaq index, over 5 or 10 years?

    Best thing I ever did 20 years ago was move all my 401(k) money out of managed funds and into SPDR and QQQ, and then forget about them.

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  • (Score: 2) by butthurt on Wednesday May 24 2017, @09:11AM

    by butthurt (6141) on Wednesday May 24 2017, @09:11AM (#514734) Journal
  • (Score: 0) by Anonymous Coward on Wednesday May 24 2017, @01:51PM

    by Anonymous Coward on Wednesday May 24 2017, @01:51PM (#514805)

    Probably many of them (to the extent that they've been around for 5 - 10 years). But as these setups become more prevalent, they won't be able to keep the information advantage on their side over such a long time frame, and the whole exercise of finding the signal that gives them their alpha becomes a data science arms race where everyone has to work hard to simply keep up with the capitalisation-weighted average market participant.

  • (Score: 4, Insightful) by AthanasiusKircher on Wednesday May 24 2017, @02:51PM (2 children)

    by AthanasiusKircher (5291) on Wednesday May 24 2017, @02:51PM (#514827) Journal

    About a decade ago, I picked up a book at an airport bookstore called The Drunkard's Walk [wikipedia.org]. It's a fascinating and somewhat entertaining read about randomness, but the big take-home message is how humans are really bad at recognizing the difference between legitimate positive (or negative) performance vs. random chance that something good (or bad) will happen in a "streak" sometimes. Basically, humans greatly underestimate the frequency and length of streaks in random distributions.

    Anyhow, the last chapter contains two graphs every investor should look at. The first was a ranked graph showing performance of the top few hundred fund managers over a 5-year period (1990-95). The top managers' funds performed 20% higher than average; the lowest were around -15% compared to average. They were all shown in order on the graph from left to right, producing a nice smooth curve downwards.

    The second graph showed the same managers' performance over the next 5 years, with the funds they managed presented in the same order. It looked like random noise. Well, not quite -- there was still a very minor trend downward, so as a group the "top" managers did perform slightly better (maybe a few percentage points) in the next 5 years. But for every fund in that top group that continued to see 20% greater returns, there was another fund that did an about-face and was now in the lowest-performing group. Meanwhile, a lot of the biggest "winners" for the next five years were seen in the middling or lower groups for the first five years.

    Bottom line: we often mistake luck for skill. That's not a reason to dump managed funds entirely, but recognize that even with an top "established" fund manager you're still likely playing the lottery. Will their streak continue for another year, 3 years, 5, 10, before it turns?

    • (Score: 2) by AthanasiusKircher on Wednesday May 24 2017, @02:52PM (1 child)

      by AthanasiusKircher (5291) on Wednesday May 24 2017, @02:52PM (#514828) Journal

      Sorry -- I should have said that obviously these graphs predate the biggest advances in the use of quants in the past 15 years or so. It would be interesting to see a similar analysis and whether the quant funds are more consistent in performance.

      • (Score: 2) by richtopia on Wednesday May 24 2017, @03:52PM

        by richtopia (3160) on Wednesday May 24 2017, @03:52PM (#514865) Homepage Journal

        This is the major question in my mind. For the home investor robo-advisors are the closest parallel, and they do minimize one of the few controllable aspects: the management price. I cannot comment on the performance of my Fidelity Go account beyond in the last four months is has performed slightly better than the share of SPY I bought on the same day to track the performance of S&P500. What I want to see is defensive measures taken if we hit a down market: I can easily put money into ETFs which track the stock market (like SPY or QQQ) but I still need to have some rules to sell if we are seeing another major recession. I pay for a robo-advisor because I want to be completely passive.

        https://en.wikipedia.org/wiki/Robo-advisor [wikipedia.org]

  • (Score: 2) by MichaelDavidCrawford on Wednesday May 24 2017, @07:04PM

    by MichaelDavidCrawford (2339) Subscriber Badge <mdcrawford@gmail.com> on Wednesday May 24 2017, @07:04PM (#515038) Homepage Journal

    he traded a basket of about 1000 commodities on the Chicago board of trade.

    Before he started quantitative investment he owned a computer store. In ten years his private - only him - fund grew to $200,000,000.00.

    It's impossible for humans to time the market, but all that's required for computers to time the market is some very complex software.

    --
    Yes I Have No Bananas. [gofundme.com]
  • (Score: 2) by JoeMerchant on Wednesday May 24 2017, @07:27PM

    by JoeMerchant (3937) on Wednesday May 24 2017, @07:27PM (#515056)

    >how many of these Quant funds have shown an ability to outperform the S&P 500 index, or perhaps the Nasdaq index, over 5 or 10 years?

    Of the Quant funds that have been around over 5 or 10 years, nearly all of them. If they could do better by investing on an index strategy, they would. Instead, they invest tens to hundreds of millions in hardware, fiber communication links, and algorithms development and after 10-15 years of playing this game the field is only growing. It not only outperforms the obvious, established, easy strategies - it does so by a wide enough margin to cover the enormous costs they sink into access, processing, and development.

    --
    🌻🌻 [google.com]