

Hedge fund robots crushed human rivals in 2014 - anacleto
http://www.cnbc.com/id/102306617

======
bsdpython
"The biggest gains came at funds that practiced a "trend following" strategy.
Those managers—who use computer models to bet on price movements in either
direction and often perform best when clear patterns emerge over several
months"

This is headed for 2008 all over again because we've learned nothing. These
algorithms rack up consistent wins for years on end, the markets rise and
rise, everyone gets bonuses and all is great. Then the market turns on a dime,
all the computer algorithms break at once because chaos theory takes over and
your trend algorithms are useless. Liquidity disappears in an instant and the
the federal reserve steps in and gives away free money to the banks until the
banks become solvent again. This will continue until the parasite kills the
host.

~~~
jim_greco
Algos didn't cause the '08 crash. The '08 crash was caused by a lot of bad
bets on the housing market. 100% of those bets were made by humans chatting on
Bloomberg or over the telephone.

Edit: No, child posts, you cannot make the leap that trend following algos are
the same thing as modeling MBS risk (which isn't an algo...).

~~~
Retric
Garbage in Garbage out. Algos directly caused the '08 crash (lot's of things
where indirectly responsible though). Software Algorithms designed to model
risks did not take into account a down economy which systemically undervalued
risks leading to lots of over leveraged institutions to fail. Arguably, many
of the people writing the software where instructed to 'tweak' their models to
the point of uselessness.

One of the major failing of modern statistics instruction is 6+ sigma events
don't look like 1-5 sigma events. Case in point global death totals per second
probably fit a very well defined curve, but Hiroshima and Nagasaki where well
outside that curve.

~~~
karmacondon
This is a misattribution. It's like saying "The nails caused the building to
collapse". The people using the tools are to blame, not the tools themselves.
The ratings agencies gave incorrect ratings to mortgage backed securities,
humans made assumptions based on greed and individual home buyers made poor
purchasing decisions.

The flash crash was the result of bad algorithms, the tools acting on their
own without significant human guidance or erroneous input. But that was a
relatively minor event that temporarily affected professional market makers.
Something like that could happen again, with a much larger impact. But the
2008 crash was not it, and wasn't related or even similar.

It is difficult to predict 6+ sigma events, but humans as a whole are no
better at it than algorithms are. There were plenty of people who saw things
that others didn't and made big short bets against the housing market. The
problem there is that everyone else didn't listen to them. Eventually we can
improve statistics to catch more outliers. Good luck improving human nature to
get people to listen to predictions that go against the herd.

~~~
busterarm
Full-on agreement with what you're saying here.

And if someone really wants to place blame, it's pretty tough to ignore the
regulatory and interest rate changes that created the environment that allowed
it all to happen. But again, like you said, good luck improving human nature.

Banks have shown themselves to be pretty irresponsible with (practically) free
credit though. That's a mistake we shouldn't repeat again.

------
minimax
_So-called managed futures funds — which trade the futures contracts of
stocks, bonds, currencies and commodities — gained an average of 15.2 percent
last year, according to Societe Generale unit Newedge._

This probably isn't obvious to people outside of the trading world, but
Newedge is a massive futures broker. This article is basically a puff piece
quoting a big futures broker telling you how great it is to trade futures. I
wouldn't read too much more into it than that.

~~~
_sword
It's reported by CNBC, which almost exclusively puts out puff opinion pieces
when its not reporting financial results.

------
xyby
"...beating most gut-driven human managers and dramatically recovering most of
their losses from 2011, 2012 and 2013..."

[http://xkcd.com/904/](http://xkcd.com/904/)

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n72
So they "crushed" other hedge funds? They returned 15.2%(1). You know what,
boring old VTSAX returned 12.6%(2). Given the risk involved, VTSAX was a much
better play. Ugh, hedge funds are suuuuuuuch a rip off.

(1) Don't know if this includes fees (2) Don't know if this includes dividends

~~~
chrisgd
I would guess the 15.2% does not include fees and the 12.6% does not include
dividends. Probably even closer after that.

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dualogy
Overheard just earlier:

"Financial markets used to be about getting money into productive enterprises,
not out of them"

Right on. Let all the leveraged bots and algos devour each other. Sooner or
later "real economy" will decouple anyway. And with the savings of millions of
individuals, pension funds and insurance corporations ping-ponging between
botnets, the _real_ "hedge" will be to remain liquid and competetive _outside_
this hodgepodge when it all inevitably ends up belly-up.

~~~
NickPollard
There are definitely things wrong with financial markets, but automated
trading is not one of them. Just like anything else, using computers to be
more efficient is a _good_ thing. Are you going to complain about Amazon and
wait for 'real retail' to decouple?

The problem with modern financial markets is that they have become quite
_abstract_. Finance is maths, which means it's code, which means you start
abstracting away from the implementation to get to a high level. Just because
it's not immediately clear to a layperson what's going on, doesn't mean it's
not useful or _real_.

Imagine what would happen for most programmers if you tried to explain to a
layperson what you do.

"I'm a developer"

"Oh, you make websites?"

"Well, uh, no, you see, I make tools for making it easier to make websites"

"Oh, like what?"

"Um, well I make a compiler for turning one language into another"

"Why?"

"Well, when you make a website, you have to do all this _stuff_ , but, well,
you could do less stuff, just more clever, and then it's easier and you don't
have to worry about for loops and such"

"What's a for loop?"

"Oh that doesn't matter. But now we can use a monadic map instead, which is
much easier, developers don't want to write loops, map is better. But
Javascript is a bit fiddly, so now I've written another language, so you can
write in that, and then you run my tool, and then you get Javascript, so the
browsers can understand it."

"Oh, so the browser only runs Javascript?"

"Yes. Well no. Actually most of them run some kind of JIT compiler, which
turns javascript into another language, and then they run that"

"So your language becomes another language which becomes another language? Why
not just write the other one?"

"Well, because that's not really what we want to do, it's awkward, and
inefficient, and bug-prone..."

"But your language isn't a real thing? No-one's actually using it? My computer
never gets it, never runs it, never understands it? Shouldn't you be doing
_real_ development?"

~~~
CmonDev
It's easier: just like CEOs delegate certain tasks to underlings, developers
delegate certain tasks to compilers and tools. So writing vanilla JS is like
CEO cleaning own office and doing accounting. Possible, might be enjoined, but
generally inefficient and annoying.

------
anigbrowl
These are interesting links, but 15 submissions in 15 minutes is way overdoing
it.

~~~
leppr
See that's why humans won't last long, can't even compute a little 7311 word
data stream in 900 seconds. So invest in robots, ok? Robots are disruptive and
future.

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_benedict
Trend following futures models typically have a very high variance in returns,
so yielding above market returns in 1 year out of 4 is not significant or
meaningful.

------
spot
Two Sigma is hiring javascript developers to build open source research
systems (the tools used by the quants to build the AIs):
[http://beakernotebook.com/careers](http://beakernotebook.com/careers)

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pfortuny
So apart from the first 6, they did as the DOW or less, which is not so
impressive. Or is it?

~~~
valdiorn
depends on the sharpe ratio.

You can flip a coin every year. Heads; double your money, tails; lose your
bet. You can easily win 3 years in a row (12.5% chance), but getting 800%
return on that risk is literally worthless in the long run, as the chance of
winning or losing is equal.

~~~
pfortuny
What I meant is... Those 'huge benefits of algorithmic hedge funds' depend on
the number of algorithmic hedge funds: if there are enough of them, you will
probably get some with outstanding results every year, won't you?

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gchokov
"Nothing new under the sun" as we are used to say. Think is.. what will happen
when even the small companies have enough processing powers and knowledge to
implement such system. What value would any currency have. Scary to think...

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pcrh
But do the robots get bonuses...? I think not.

~~~
valdiorn
the people who build the "robots" (Algorithms, or trading systems are a more
applicable name) do.

~~~
pcrh
Quite. So it isn't really robots versus humans, but one algorithm versus
another, the humans are using a method too.

