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