
AI Hedge Fund Goes Live on Ethereum - pcmonk
https://medium.com/numerai/an-ai-hedge-fund-goes-live-on-ethereum-a80470c6b681
======
Animats
Numerai combines two things - a prediction competition, and yet another
complicated and obfuscated crypto coin scheme.

The prediction competition is like the Netflix Prize [1]. They give you a data
set and a prediction goal, you submit an algorithm, and there's a winner. OK,
although if you can do well at that, you're wasting your time giving your
results to Numerai. You're competing for a total payout of $15K/month.

Then, for no particularly good reason, this is combined with some smart
contract / crypto coin scheme. Other than for PR purposes, it's not clear what
the gain is. Everybody is dealing with Numerai; it's not a many-to-many
system. It's more like airline reward points.

The hedge fund itself doesn't use Etherium; it's completely traditional.[2]

[1]
[https://en.wikipedia.org/wiki/Netflix_Prize](https://en.wikipedia.org/wiki/Netflix_Prize)
[2] [https://www.forbes.com/sites/laurashin/2017/02/21/this-is-
th...](https://www.forbes.com/sites/laurashin/2017/02/21/this-is-the-worlds-
first-cryptocurrency-issued-by-a-hedge-fund/#a76df0760b69)

~~~
daveguy
You don't submit an algorithm, you only submit your predictions. Your
algorithm to generate your model predictions is not known to Numerai.

The data you work with from Nunerai is obfuscated, so you can't take it
directly to the market.

It is an interesting no-risk way to evaluate models/algorithms. A lot of
people are there to learn on a tough problem.

Edit: The reason for the coin is to allow data scientists to give confidence
information about their models. There is an additional payout in USD
associated with NMR staking (currently an extra ~$4000/mo for the most
consistent models).

~~~
shlomok
And you find that a compelling reason to tokenize it? I don't.

~~~
daveguy
Very compelling. Without staking the hedge fund doesn't have any knowledge of
how confident you are in your estimates. If you can put the value of a coin up
against your confidence estimates then you are giving that information in a
very real and binding way.

Do you have another way data scientists can give estimates of their model's
ability to do better than chance _and be held accountable for that estimate_?
Additional prize pool based on giving good reliability estimates seems like an
excellent way to do it.

 _The tokens are not the value of the numerai fund itself_. They are merely a
tool for the staking process.

~~~
oh_sigh
Yes...I remember a few years ago, with one of the algorithm testing sites, a
group basically just submitted 20-30 pseudo-random predictions. One of them
ended up winning, but it wasn't like the team actually had a useful algorithm,
they were just playing the system because betting was free.

~~~
isubkhankulov
why not stake with bitcoin or ether?

~~~
dreamdu5t
Because they can't mint and award it to users. NMR is only earned by
performing well.

~~~
isubkhankulov
theyre listing it on poloniex FYI

------
chollida1
One of my favorite things about the stock market is you know exactly how good
you are at all times. Your bank roll is your track record and its very black
and white.

Has anyone seen any returns for Numerai? They've been around for a while and I
wish they would "put up or shut up" as the saying goes. I see that they have
paid out money to developers but its not clear if the fund itself is
generating alpha above their benchmark index or not.

One of my jobs is to review people who claim to have created algos that can
generate alpha. Sadly it's very common for people to talk a big game about the
returns they can generate, but then are unable to show any reliable track
record when pressed.

Some of reasons I've heard:

\- well we weren't actually trading, this is just all theoretical results

\- well we didn't include the first 6 months of the year as we weren't
profitable yet

\- yes if you don't include theses particular trades we were profitable.

\- yes we made money, its just that the market itself made more with less
volatility.

I really would like Numerai to succeed, mostly because I'm interested in if
the idea of mixing 1000's of models together and letting people vote on their
weightings can succeed.

~~~
xapata
> you know exactly how good you are at all times

Ever heard a poker player tell a "bad beat" story?

~~~
bookmarkacc
Only bad players who don't understand variance.

~~~
xapata
Aww. The bad beats are what stand out! Even better when you're the villain,
pulling that last deuce on the river.

------
jcfrei
I think it's important to point out that this is their second attempt at
making a hedge fund with crowdsourced investment strategies. Their first
attempt failed because they would pay out rewards (bitcoins) based on the
performance in a historical benchmark. This made the whole machine learning
competition susceptible to intentional overfitting (common problem in the HF
world). They outline the problem in their white paper:
[https://numer.ai/whitepaper.pdf](https://numer.ai/whitepaper.pdf)

~~~
daveguy
1) they always paid out USD values, but transfered equivalent Bitcoin.

2) they had problems with overfitting leaderboards based on validation sets,
now they pay out based on live results resolved over 4 weeks. That was solved
several months ago before the crypto currency went live or really had anything
to do with it.

3) Payouts are now in both USD and NMR for the competition (based on live
data).

So, they did have some problems at first, but that was solved by paying out on
live results rather than a leaderboard based on validation data. That solution
didn't have to do with the cryptocoin.

The purpose of the cryptocoin is that data scientists can earn _more_ USD (in
addition to the well functioning direct competition) by staking NMR. The NMR
and conversion rate they require tells the fund how confident they are in
their model. This additional confidence information, outlined in the paper you
link, gives the fund a better idea of how to weight individual competition
submissions for their meta-model that determines asset allocation.

~~~
isubkhankulov
why not stake in BTC or ETH?

IMO, creating a new deflationary currency skews incentives towards hoarding
the coin.

~~~
SolarNet
It is an ETH coin. Read more carefully. The whole benefit of ETH over BTC is
that you can build coins inside of ETH.

In this case it is basically just a colored coin, the point of which is for
the people who hold them to be able make stakes on their long term performance
(hence plain ETH would not be useful).

~~~
isubkhankulov
they're listing NMR on poloniex FYI

------
hendzen
Here's the issues I have with Numerai -

1) Bullshit marketing where they advertise the usage of "homomorphic
encryption". If you've looked at their datasets they are most likely taking
some fundamental and pricing factors and then performing min/max scaling.
Nothing too crazy... and I think it would be possible to reconstruct which
stock each observation corresponded to given some effort.

2) Professional quants care a lot about the way their features are
constructed. The type of data you are looking at affects the type of model you
would use... e.g. some kind of GARCH process for lagged time series data vs
something different for sector betas, etc.

3) Given (1) there is an insider trading opportunity to reconstruct the
underlying data and then submit predictions based on unknown or illegally
sourced features.

~~~
qeternity
#3 is actually a neat way for them to skirt insider trading laws. Insider
trading is only illegal if you _know_ that the information is material
nonpublic (and a few other requirements). IANAL, so happy to be corrected if
I'm missing something.

~~~
isubkhankulov
i think he meant insider trading the numerai contest, not the stock market
itself

------
skynode
I'd rather geek out at Quantopian, than play _latest-tech-buzzwords_ with
these guys. Definitely, a sucker game.

~~~
a_imho
Last time I checked, I thought their offering was more insulting than
lucrative for the work required.

------
juskrey
Why do anything if you just can raise and raise and raise money?

~~~
skynode
Well, at some point, you reach your limit in shares, so...

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siliconc0w
What would be pretty cool is a DAO that takes in money and models, auto
invests, and pays out to investors and data scientists. I don't really know
enough about Ethereum to see if that is possible to encode into a smart
contract.

~~~
Jabanga
Definitely possible. Conceptually you're just debundling the roles into
discrete tasks with automated mechanisms that assign those tasks and reward
completion of them.

The problem is that it's a complex undertaking to build it, because a lot of
the building blocks have to be invented, and they have to be built to the
highest standards, both in terms of efficiency, given the cost of Ethereum
computing resources, and in terms of security, given the underlying platform
is immutable and does not allow reversals of hacks.

------
nyolfen
the embedded video reminds me of this:
[https://twitter.com/Imperium1770/status/860839761921138688](https://twitter.com/Imperium1770/status/860839761921138688)

------
wslh
Is AI fine with this? The few hedge funds I know work more using quant brains
that discover models than AI.

------
simondlr
Curious to know what future plans there are with this. The mention of DAOs
seem interesting?

------
45h34jh53k4j
I think turning your back on BTC is the worst mistake you could make. Enjoy
your ride down with ETH, as it struggles under the weight of (scam) ICOs.

~~~
bdamm
What's an ICO and why is ETH going to struggle under their weight?

~~~
zzalpha
Initial coin offering.

[https://qz.com/1004892/the-bancor-ico-just-
raised-153-millio...](https://qz.com/1004892/the-bancor-ico-just-
raised-153-million-on-ethereum-in-three-hours/)

Think crowd funding meets IPO with digital contracts.

Which, to me, is just begging for another DAO fiasco... I know I have my
popcorn ready!

~~~
thess24
Maybe you could clear up something I've been wondering as someone new to
cryptocurrencies. In the ICO, Bancor exchanges their own, newly created coins
for Ethereum and the 'investors' are hoping that the new Bancor coins value
will go up? So the Bancor team raised ~150 million dollars (in Ethereum) with
no strings attached -- ie, no investors, debt, etc? Do I have this right?

~~~
ve55
This is accurate, all of the ether that bancor owns it can do whatever it
wants with - the investors get nothing except a centralized token (BNT) that
Bancor can control completely (create, delete, etc, see
[https://medium.com/unchained-reports/bancor-unchained-all-
yo...](https://medium.com/unchained-reports/bancor-unchained-all-your-token-
are-belong-to-us-d6bb00871e86) ), the investors do not get equity or insurance
or any other similar guarantees.

~~~
thess24
Wow that is truly unbelievable. Thanks for the clarification and the link
(reading now).

