
David E. Shaw and the Ultimate College Hedge - wallflower
http://nymag.com/intelligencer/2019/09/david-e-shaw-college-donations.html
======
nir
I think these articles and the responses are missing the real point which is
how an Ivy League education became so important in America.

I grew up in Israel near the Technion, our MIT equivalent which produced a few
Nobel Prize winners. It's not a big deal to get in, if you have poor high
school scores you take a year long prep course, classes are hard but most
people push through. Having a Technion degree might give you a slight edge
getting your first job but that's that - you'll be judged by your performance
moving on, not on your alma mater.

When I lived in the US for a few years, I couldn't understand how people
allocate such importance to a person's high school performance (which is
basically what determines their alma mater in the best case scenario, before
family donations etc). To me it signals a risk-averse mentality that fears
taking a chance on a potential hire.

~~~
DollarGuru
Educational elitism is just another sign of the class system at work.

~~~
jshaqaw
Agreed. As I age I am saddened by the growing realization that the educational
institutions which I love and am proud of are key engines of perpetuating a
class system.

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electricslpnsld
When I was an undergrad Prof. Joe Traub (famous for applying Quasi Monte Carlo
to derivatives) passed away and they had a whole lecture series in memorium.
David Shaw showed up and, having bailed on Columbia CS because they didn’t
want to fund his ideas on algorithmic trading, was straight up like fuck this
department y’all are dumb and could have been billionaires. It was pretty
crazy, I don’t think I’ve ever seen more uncomfortable squirming in an
audience!

~~~
tacon
In 1994, I happened to be on temporary assignment from IBM Federal doing mass
storage systems for the Cornell Theory Center, at that time an NSF
supercomputer center. I attended the Cornell CS department colloquiums, and
one time David E. Shaw came to give the lecture. It was one of the most
interesting lectures I have ever attended. Shaw used no notes or visual aids,
but started with his trying to raise VC money for a parallel supercomputer
company.

One day he pitches to the gnomes at JP Morgan, and they tell him they aren't
interested. But... since you are here anyway, do you have any ideas about
solving these kinds of problems with computer science? And they shared some of
their issues in the early 80s. Shaw went back to his office and a week later,
they called and offered to add a zero to his salary if he would come work for
them. Well, yes!

Shaw described the basic concept of statistical arbitrage, where each effect
on a predicted price added some variance. If someone knew enough to more
accurately reduce the variance on the models, they could essentially do
arbitrage while other market participants could not be sure the transaction
was riskless. He described the early experiments at JP Morgan, where they
needed to calibrate a parameter in their model, so one day JP Morgan did 2500
trades one way, and 2500 trades another way, and by measuring the market
response, Shaw had his parameter. He estimated JP Morgan spent about $5
million or so to measure that parameter, and then used that number for years
for a many, many fold return on investment. He also said that the next market
participant trying to measure that parameter had to spend $100 million to get
the same parameter.

He made it clear he was not looking for investors, that they push the effects
as much as they can without distorting the market and ruining their advantage.
Over time, the ideas leak out of the firm and stop working, but his team is
always coming up with new ideas. He claimed a riskless return year after year
of about 15% at the time. He was there at Cornell trying to recruit the top CS
students. He said that those quants could sit in a room alone, working on
technical problems, never have to manage anyone or do anything business
related, and share in the profits of their ideas, with returns for some
topping $1 million/year.

~~~
svd4anything
> He described the early experiments at JP Morgan, where they needed to
> calibrate a parameter in their model, so one day JP Morgan did 2500 trades
> one way, and 2500 trades another way, and by measuring the market response,
> Shaw had his parameter. He estimated JP Morgan spent about $5 million or so
> to measure that parameter, and then used that number for years for a many,
> many fold return on investment. He also said that the next market
> participant trying to measure that parameter had to spend $100 million to
> get the same parameter.

almost exactly the story but with a few additional twists, specifically having
access to detailed information on client trading flow. Many of the kings of
statarb had a past with a direct link to the electronic order desks of major
brokerages, PDT and Shaw with MS and the list goes on worldwide. This gives
them the insight needed to build models that can detect statistically the
difference between trending informational flow and random fleeting uninformed
noisy flow which reverts.

As of today these statarb incumbents will be fairly difficult to challenge as
they have invested in having superior expensive raw informational data sets
and additional the size of their trading gives them private information.
However their costs are likely too high so the new game will be to find 10x
cheaper approaches in costs as the techniques and math are not as advanced as
they claim. The ugly truth is most of their PhDs are twiddling their thumbs
and they are effectively buying up anyone interested in the field in hopes to
deprive smaller upstarts from talent at an affordable price.

Founder of mega titan firms like DE Shaw will certainly be exceptional
individuals and will obviously cary with them huge egos which will blind them
to the degree which luck and being in the right place at the right time
played.

------
doctorpangloss
If Shaw wanted a college guarantee, he could merely start a few of them, with
that kind of money.

It's a big puzzle to me why this doesn't happen more often. In the past it
did. Fighting inequality or discrimination, especially at the professional
level, started when someone said, "Okay, I'm just going to make a school for
my own then." My favorite example of this is the dismantling of Jewish
exclusion at New York medical schools, which happened by creating new medical
schools that did not discriminate. [1]

The idea that prestige is entrenched, basically, is wrong. Maybe that idea is
the main obstacle to education reform.

Although maybe this is already happening for rich people. Alt Schools come to
mind, although its story has come to an end.

I don't think it's possible for the superrich, as a class, to guarantee
admissions for their kids at elite universities, because there's only so much
space. So why haven't they built their own school?

[1]
[http://europepmc.org/backend/ptpmcrender.fcgi?accid=PMC18080...](http://europepmc.org/backend/ptpmcrender.fcgi?accid=PMC1808007&blobtype=pdf)

~~~
streetcat1
He cannot start a new college. The CS program for undergrad in Havard is
exactly the same as your closer public college.

It is about signaling, not education.

And for that, you need time for the college "image" to become elite.

~~~
harryh
_The CS program for undergrad in Havard is exactly the same as your closer
public college_

I'm sympathetic to your signaling point of view, but this statement is
definitely wrong. CS curriculum varies a lot between the top schools and a
typical public university.

For example I just now looked at the labs for Operating Systems at University
of North Carolina and compared that to the work I did at CMU. UNC has students
implement malloc and free. At CMU I implemented a process scheduler and
virtual memory system.

~~~
JoshuaJB
(Disclaimer: I'm a PhD student in real-time operating systems at UNC.)

Each program has its own strengths, and simply comparing between similarly
titled classes is an unfortunately poor metric. (Eg. At UNC, OS is really an
introduction to C and OS concepts class. The Operating System Implementations
class sounds more similar to CMU's OS Class.) Academic programs need to be
compared holistically, and only if one is consistently worse than the other do
you have an answer. (Otherwise I could go and claim that UNC is better than
CMU because our real-time group is much better.)

Of course, that's too much analysis for most people (including me), so I would
argue that looking at where graduates work is typically an okay proxy for
undergraduate educational quality.

~~~
harryh
I fully admit that my entire understanding of the UNC curriculum is what I
just gathered in 5 minutes of googling/reading. So ya, just comparing labs
from similarly named classes is definitely not the best methodology.

That being said I've spent a lot of time in my career recruiting students out
of undergrad. And I've noticed significantly more rigor and in depth work from
students from some of the top schools compared to most everywhere else.

------
starpilot
This comment from 2011 by siavosh, on another NYMag article about Wall Street
really rings true:

> I hate articles like this. I used to work on wall street, and these sort of
> articles were rampant up until the burst: they glamorize financial
> "wizards", hedge funds, trading life etc. They're financial porn. They
> glamorize what, in my opinion, is a dubious field. All the while attracting
> all sorts of people into a field that has already proven it's "value" or
> lack there of to society.

[https://news.ycombinator.com/item?id=2813902](https://news.ycombinator.com/item?id=2813902)

Edit: It's also funny how the top reply by btcoal describes this current
article perfectly:

> These articles typically have a set format: 1. Intro into the mysterious
> culture of the hedge fund 2. Background on the precocious child prodigy
> turned market whiz 3. Description of firm's hiring practices of PhD's etc 4.
> Questioning value of Hedge Fund's to society 5. In conclusion, this hedge
> fund makes a lot of money...

~~~
darawk
Just to clarify, since people seem confused on this point, hedge funds add
value to society thusly:

1\. Companies need to raise capital.

2\. Those companies want to raise capital at a rate closest to the true value
of shares in their enterprise.

3\. In order to do that, the people who buy those shares need to know that
they can resell them later, at a similarly efficient price. This is called a
"liquidity premium". If your shares cannot be quickly resold at an efficient
price, you are incurring a negative liquidity premium.

4\. Because of the foregoing, it is extremely valuable to society for markets
to price things efficiently. This is a service that needs to be performed by
someone. That someone is, for the most part hedge funds.

The ideal scenario (which we are tending towards) is that there are a very
small number of extremely sophisticated players that keep markets efficient
for everyone else. The more money David Shaw makes, the less money there is
for other people to make. Which means we need to employ fewer and fewer people
in the business of asset price discovery.

Price discovery is an important and necessary function, and the fact that
there are these few people making tons of money from it is actually kind of a
great thing for the world. All those billions David Shaw made represent many
millions _not going_ to other people in finance. Which means those minds are
freed up to work on other productive things.

~~~
qnr
Evidence for existence of a (il)liquidity premium in the stock market is very
weak. What this means is that the market has been liquid enough for a long,
long time.

Consider high frequency trading. Does it really matter for capital allocation
that you can sell your Google stock for a fair price in 10ms instead of 20ms?
There are hundreds of PhDs working on algorithms and billions invested into
infrastructure to make those 20ms into 10ms, which I'd argue is a byproduct of
how exchanges work and doesn't serve humanity in any way.

~~~
darawk
> Evidence for existence of a (il)liquidity premium in the stock market is
> very weak. What this means is that the market has been liquid enough for a
> long, long time.

That's not entirely true. Liquidity is often used to mean 'ability to exit
your position at the most recently traded price', or something similar.
However, i'm using a slightly expanded definition, which means: exit your
position at its intrinsic value. The ability to sell your stock for what its
actually worth is extremely valuable, and statistical arbitrageurs help you do
this.

> Consider high frequency trading. Does it really matter for capital
> allocation that you can sell your Google stock for a fair price in 10ms
> instead of 20ms? There are hundreds of PhDs working on algorithms and
> billions invested into infrastructure to make those 20ms into 10ms, which
> I'd argue is a byproduct of how exchanges work and doesn't serve humanity in
> any way.

Here I agree with you, although I think it's important to understand that a
lot of high frequency trading is actually making markets efficient. That is to
say, the service being provided by HFTs is truly valuable. What is not super
valuable is squeezing out that last marginal millisecond. The energy poured
into the last millisecond is indeed deadweight loss, but I think the amount of
energy being spent there, while very large in absolute terms, is not so large
relevant to the financial industry writ large.

So yes, I agree that the competition at the margin in HFT is probably not
productive, it is a byproduct of the necessary service that HFTs provide and
the dynamics of the environment in which they provide it. I also think that
any 'solutions' to the problem of that energy expenditure are likely to make
everyone worse off over all, not better. You really want the HFT game to be a
winner take all market, in the way that it currently is, precisely because
competition is deadweight loss.

If you do things like introduce purposeful stochasticity into order submission
(for instance), you're going to make the competitive equilibrium _more_
multipolar, so that instead of one dominant firm taking it all, you have a
bunch. And that's actually worse for everyone. What we want is basically 1 HFT
firm that is the best and does a good enough job that nobody else tries to
compete, and earns a reasonable profit for providing the efficiency and
liquidity that they do. I think the competitive environment is actually
converging on that, even though it may not look that way from the outside.

------
Gatsky
The article doesn't talk it about it much, but it is not entirely
inconsequential that he has started a company which for a while was at the
cutting edge of high performance computing for protein structure prediction.
The field has moved a little away from this idea lately.

The billionaire owner of Renaissance has done something similar. It's
interesting. Rather than giving the money away to academia or other
philanthropic causes à la Bill Gates, they choose instead to micro-manage it.
Shaw and the Renaissance guy both formerly worked in academia, and I can see
why this would make them skeptical about large donations to academic
institutions (beyond the motives proposed in the article).

------
pinewurst
And after all that manipu-vestment of system and children, his 1st kid
graduates with a Yale Psych BS and becomes an apprentice comedy writer (quite
probably assisted by family connections).

Think of how transformative that Yale slot could’ve been to someone not
standing on a multi-billion dollar pile.

~~~
Buge
On the other hand, he gave $37 million to various schools, which those schools
might be using for scholarships for a number of students not standing on a
multi-billion dollar pie.

~~~
ryacko
Endowments are funds that are restricted from being spent, however interest
from the investment is used to fund other activities.

------
lordnacho
I wonder how the kids feel about it. It's like being born royal, there will
never be a way for you to stand on your own feet. Everyone will be polite but
you'll always wonder what they really think.

And yet you still have to work quite hard at those prep schools and elite
colleges.

A friend of mine of similar status simply doesn't use the family name, went to
an ok but not Uber-elite school and works a normal job.

------
fakename11
Wow, how can people with normal income families even compete with these very
wealth applicants for spots in the Ivy League? They can create such out sized
extra curricular activities for themselves that just dwarf everything.

~~~
sgpl
Yeah. What really stood out for me was the dissonance between what the mother
was doing vs what she was prescribing/writing about:

 _> One of her areas of expertise is how to pay for college. In her writing,
media interviews, and YouTube videos, she cautions parents not to “follow the
herd with your donating dollars” or pin their hopes for their children on
getting into brand-name colleges. “Don’t believe the hype,” she tells them.
“You might find yourself obsessing over those annual college rankings. Don’t
take them too seriously.” The sensible solution, she argues, is for families
to “pick a few financial safety schools” — public universities close to home.
A degree from an elite college, she reminds readers, may not translate into
higher earnings in later life. “The Ivy League isn’t necessarily the gravy
train.”_

VS

 _> Shaw and his wife, financial journalist Beth Kobliner, have sent their
three children to an elite prep school, supported them with hyperqualified
nannies and tutors, and encouraged their extracurricular interests. But while
the typical snowplow parent quietly eliminates potential obstacles by clearing
the road ahead, Shaw and Kobliner have seemingly bulldozed an entire mountain.

>Starting in 2011, when the oldest of their three children was about two years
away from applying to college, the Shaw Family Endowment Fund donated $1
million annually to Harvard, Yale, Princeton, and Stanford and at least
$500,000 each to Columbia and Brown. The pattern persisted through 2017, the
most recent year for which public filings are available, with a bump in giving
to Columbia to $1 million a year in 2016 and 2017. The foundation, which lists
Kobliner as president and Shaw as treasurer and secretary, has also
contributed $200,000 annually to the Massachusetts Institute of Technology
since 2013.

>The total donations for “general” purposes across seven years and seven elite
schools are $37.3 million, which represents 62 percent of the foundation’s
giving over that period._

~~~
lotsofpulp
Dissonance would be if she accepted two inconsistent ideas at the same time.

It's possible that she's giving out advice that she would not apply to
herself, perhaps to reduce competition for her own strategy.

------
droithomme
Fun article. This Shaw guy is a real character!

I suppose the author is criticizing him, but I ended up liking Shaw from the
article.

~~~
sokoloff
I worked in a Cambridge MA based DESCo company 1997-2000 and I have to say the
caliber of talent across the company (all roles/levels, our receptionist had a
PhD IIRC) was the highest I’ve ever seen. I loved it and suspect/wonder if it
was the 1990s fintech version of BellLabs.

Can confirm there was a well known, published policy on going into David’s
office and we got a half page memo from David detailing the importance and
exactly how to white space D. E. Shaw & Co.

The company ran with excellence as the goal in everything. Even with that,
there was a bit of riches to ashes to riches trajectory. I loved my time
there, still work with several talented colleagues I met there, and think
highly of David Shaw and what he’s created.

~~~
tasuki
I'm slightly surprised at the necessity of detailing the importance of exact
white spacing of the company name. I would expect the talented employees to
know perfectly how to spell the name of their detail-oriented employer.

~~~
droithomme
I related to his memo mention! Almost certainly some employees were writing
some of these on occasion in their sigs in emails to clients:

D.E. Shaw & Co.

D.E.Shaw&Co.

DE Shaw & Co

D. E. Shaw.

It's a branding consistency issue. The space and what it conveys (attention to
detail) is incredibly important in retaining the trust of some clients who are
likewise particular.

Some years ago I sent out a memo about the use of an apostrophe in a company
name that was perhaps received similarly. Some think it doesn't matter. It
matters to some. That's who it is done for.

~~~
tasuki
Oh I can relate too. I was just surprised the super-elite employees would make
such basic mistakes.

------
zubairq
I always remembered D.E.Shaw, as I would visit the London offices at least
twice a week over the course of 6 months, to see friends who worked there.

Only hire the true hackers seemed to work :)

------
m_gscie
I was at Cambridge U and the college I was part of had an application from the
child of a hyper-wealthy ruler of a notorious country. The money of the ruler
could have materially changed the prospects of the future of the college. So
what they did was create a new slot in the class especially for the potential
new student, so no other students would be disadvantaged.

I would expect many schools would do a similar thing. Any school that would
receive his kid's application would surely admit them under similar rules. He
does not need to hedge his options.

------
ackbar03
I'm not sure this produces healthy adaptable well adjusted kids for shaw

~~~
simtel20
He had his company buy FAO Schwarz and keep it running for years at least
partly so it would exist as part of their childhood. Billions of dollars
distort reality, and it's hard to imagine a good long term outcome from that
much distortion, even when it comes from a place of love.

------
choiway
You spend a couple hundred dollars to help get your kids into school, you go
to jail. Spend a couple million tho...

~~~
wmf
That's why some people say the scandal is really about theft: the parents were
getting admission slots at an unfair discount and those slots should have gone
to people who donated more.

~~~
harryh
It wasn't theft because of a discount.

It was theft because the money didn't go to the school but instead went to the
facilitating lawyer and some corrupt employees.

------
alephnan
> My bosses would tell me that if my spending eight hours on something would
> save David five minutes, it would absolutely be a good use of my time.

In addition to risk aversion, the article also talked about his efficiency and
value of his time.

------
mlevental
i don't understand the point? if i have multiple billions of dollars and my
kids want to do something who is going to ask them where they went to school?
in fact why are they even going to school?

it's like this thought i had about superman being buff - he's the last person
that needs to lift weights

~~~
streetcat1
The point is that shaw understands how much luck plays a role in everything
that happens. (This is why most of the money in his firm in treasury bills,
and even those are disrupted by negative interest rate).

He is extremely risk-averse, even with all of his money.

Hence, if you judge his action trough the lanes of risk minimization, it will
all make sense.

~~~
tasuki
> He is extremely risk-averse, even with all of his money.

Perhaps he's extremely risk-averse _because_ he has all this money. Making
more money would not have much impact on his life, while losing it would make
a significant difference.

