
BlackRock's Robot Stock-Pickers Post Record Losses - TuringNYC
https://www.bloomberg.com/news/articles/2017-01-09/blackrock-quants-sustain-record-losses-in-setback-to-fink-plan
======
TuringNYC
I submitted this article because I was especially intrigued by the high-
profile ex-Google ML Researcher hire (and then departure.) Anyone know what
exactly the BlackRock ML group was doing? Was it supposed to be a competitor
to Renaissance Technologies
([https://www.bloomberg.com/news/articles/2016-11-21/how-
renai...](https://www.bloomberg.com/news/articles/2016-11-21/how-renaissance-
s-medallion-fund-became-finance-s-blackest-box))? Was this an NLP-driven fund
gone haywire?

I'm particularly interested as I was recruited for this group multiple times,
so a bit relieved I didn't pursue it. I wonder if there are any lessons (about
what to avoid) to be learned here about the way the group was structured...or
if it was simple randomness gone wrong.

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deepnotderp
Who was the google ML researcher hire?

~~~
hellofunk
[http://www.reuters.com/article/us-blackrock-hire-google-
idUS...](http://www.reuters.com/article/us-blackrock-hire-google-
idUSKBN0OO2C720150608)

~~~
deepnotderp
Thanks!

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tonyedgecombe
"It instructs the team to sell when losses become sizable, regardless of what
its mathematical models say, according to a person with direct knowledge of
the matter."

Hard to blame the robots then.

~~~
CoolGuySteve
The alternative being to assume your model is immaculate while you ride it
into bankruptcy?

"The market can stay irrational longer than you can stay solvent" -JMK

~~~
vijucat
If I remember this correctly, research indicates that if the portfolio is
being driven by a random walk process, a stop-loss always causes a reduction
in returns (negative stopping premium), i.e., stop-losses are useful only if
the return generating process can be shown to not be a random walk.

Also, they tend to mess with your mind (loss-aversion psychology, deep feeling
of pain at losses) and make you exit and enter the trade multiple times,
adding up to transaction costs, too.

All in all, a) Buy and Hold may actually be quite sensible and b) stop-losses
are actually much more complicated than you'd think and seem to be a
mathematical rabbit hole.

Stop-losses may make sense in, say, an intraday pair-trading strategy where an
analysis of past return evolution clearly shows that winners keep winning and
losers are hopeless beyond a point.

~~~
mrchicity
Exactly. Unless you can show that the price continues to move against your
losing positions by more than their cost to liquidate, you shouldn't do it.
Your screw-up was putting the bad trade on in the first place.

I'm especially surprised it's used in a model like this. Most quant funds use
some type of portfolio risk management to allocate capital toward bets that
with the highest expected return while controlling overall risk. That losing
stock may be offsetting other risks in the portfolio.

As I mentioned in my other comment, a stop-loss is a very crude approach to
risk management. It will help control the middle of your left tail, but the
far left tail extreme events cannot be protected against by such a rule.

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binaryanomaly
As I understand the article the "robots" would have done more or less ok. It
was human intervention that caused more losses.

This is exactly what not should happen when investing longterm: Being driven
by emotions rather than rational facts.

~~~
adwn
> _This is exactly what not should happen when investing longterm: Being
> driven by emotions rather than rational facts._

Putting a limit on one's potential losses is pretty rational, not emotional.
Models are not perfect, and you do not want to find yourself with high paper
losses when they fail.

Of course, if your models don't work well together with stop-loss limits, then
that's a problem.

~~~
ohyes
But you do that by properly sizing your positions, not by panic selling.

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fauigerzigerk
_" He also pointed to the group's longer-term track record of outperformance.
[...] The firm doesn't disclose the peer groups or benchmarks it uses for
comparison."_

My track record is much much better!!! Honest!!!

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NPMaxwell
Stock prices screw up validation with back testing. I tried using stock prices
to illustrate random walks and the superiority of naive forecasts with random
walk data. Only problem: they aren't random walks. They are random sequences
of predictable pattern. Frequently, a regression model, or Holt-Winters, or
neural net will outperform the naive forecast on backtests, because it was a
better model before now. The challenge, is that now it isn't.

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ChuckMcM
_" BlackRock inherited the three-decade-old quant business with its purchase
of Barclays Global Investors in 2009. Initially, the group was a big success
under new management, delivering outsize returns. More recently, things
haven’t panned out quite as well."_ \-- well you know those Barclay's Boys[1]

Its an interesting question about machine learning and market returns. But
there is a remarkable number of people who seem to just step over the line of
legality and pick up the extra profits they need which taints the whole
industry.

[1] [https://www.theguardian.com/business/2016/jul/04/libor-
riggi...](https://www.theguardian.com/business/2016/jul/04/libor-rigging-
scandal-three-former-barclays-traders-found-guilty)

~~~
airlust
BGI was basically a subsidiary and run independently. It was originally part
of Wells Fargo (hence the SF HQ) - just pointing out that although it had the
Barclays name, it was separate.

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B1FF_PSUVM
One of these days I may finally understand what was the problem we were trying
to solve with all these increasingly complicated financial thingamajigs. And
what exactly is the benefit we derive from them.

Not betting on it, though.

P.S. Looking for something simple, e.g. "If you have derivative trading, your
GDP will be 5% larger, and the gain is spread across the population in
proportion to income." The kind of things you have for engine efficiency, or
compiler optimization ...

~~~
pavlov
I upvoted you because I don't understand the benefit of quant funds either.

With short selling, derivatives and high frequency trading, I can at least see
the argument for increased liquidity and so forth... But how does society
benefit when leading AI research minds spend their time building gambling
models that try to predict the sentiment of other gamblers?

At the same time, I recognize that forcing any such social logic onto research
is a slippery slope towards Soviet-style government-stunted research. So I
guess I'll rather have machines gambling trillions of dollars.

~~~
candiodari
When push comes to shove these things determine the allocation of resources in
society. How many people does a company making spoons gets to hire or should
we put more of them on webforum moderation ? Same for cars/glass/shoes/...

The idea is that letting algorithms decide will result in better/more
productive allocation of resources, which will result in more and better
everything.

Of course, is that reality ? I would point out, however, that stock markets
resource allocations are far better than royalty/governments allocating
resources.

~~~
olalonde
> When push comes to shove these things determine the allocation of resources
> in society.

John Bogle, founder of Vanguard and renowned investor, seems to disagree with
you: "The stock market has nothing—n-o-t-h-i-n-g—to do with the allocation of
capital. All it means is that if you’re buying General Motors stock, say,
someone else is selling it to you. Capital isn’t allocated—the ownership just
changes. I may be an investor, you may be a speculator. But no capital goes
anywhere. This is basically a closed system. You have new IPOs and whatnot,
but they’re very small compared to this vast thing we call a market, which is
now around $24 trillion. The allocation of capital? That’s just nonsense."

I think you are mixing up the concept of a market economy with a specific kind
of market, the "stock" market.

~~~
rz2k
That sounds like an exaggeration in order to make an unrelated point.

Why would people sell equity in their company except for cash, and why would
you pay cash for ownership in a company except for the stream of income it
represents _and_ the secondary market for that ownership?

How come people decided it is illegal to trade ivory from an elephant killed a
couple hundred years ago? Was it made illegal to possess child pornography
that was already created only because it is morally toxic, or does said
consumption also induce demand for additional victims?

Even though debt markets have a lot more to do with day to day financing of
corporations, equity markets have a great influence on terms. Furthermore, the
unavoidable importance of secondary markets for debt and their derivatives can
be understood by considering the importance of secondary markets with respect
to prices of homes, automobiles, or any other large consumer purchases.

~~~
olalonde
I didn't mean to imply that stock markets were not important, just that
"allocating resources" in the sense that parent meant, e.g. "How many people
does a company making spoons gets to hire or should we put more of them on
webforum moderation ?", being its primary purpose seems like a stretch (except
for the occasional new IPO / stockholders' meeting). If anything, venture
capital and as you mentioned, debt markets are closer to this idea of
allocating resources.

My main point really was that the examples parent gave seemed much closer to
examples of market economics in general and would hold true, with or without
stock markets.

~~~
rz2k
I can see the limitations in equating stock price directly with GM retooling a
factory for a new model year, but it is a far more accurate depiction of what
is going on, even if a little abstract, than to say that they have nothing to
do with each other and even spelling it out letter by letter. Saying that it
is basically a closed system is even more bizarre.

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grondilu
I've always been puzzled how it could be possible for a machine to predict
stock markets, even on an purely hypothetical basis. To me the idea seems to
generate the same kind of paradoxes as time travel or oracles.

I mean, imagine there is a machine that is capable of predicting the markets
with 100% reliability. Then soon enough, the machine will acquire a reputation
and everyone will follow its advice. The machine says "the price of X will go
up", everybody would buy X, so the price of X would indeed go up, but this
price surge would have only been initiated by the machine statement and we'd
have a self-realizing prophecy. Other situations would be more complicated I
suppose, but in every case the machine would have to take into account its own
prediction, which would be some kind of a mise en abyme.

In the end just like antic oracles, the machine would have to make cryptic
predictions that would make sense only with hindsight.

~~~
devilsavocado
Try out your thought experiment again with a machine that can predict markets
with 55% reliability, or 50.1% reliability . This more likely reflects
reality.

If someone had a machine that could predict the stock markets with 100%
reliability, or even 55% reliability, do you think they would make those
predictions known to the public? Or would they start a hedge fund and become
one of the wealthiest individuals of all time?

~~~
runeks
As far as I can see, making the information available to the public isn't even
a choice. There is no market information you can make available to the public
that will make everyone richer. The only people who get richer are the ones
who act before it becomes public knowledge. When they are done, asset prices
reflect the now public knowledge, and there is no longer a profit to take.

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scurvy
Any thoughts on Blackrock's smart alpha ETF offerings like MTUM, QUAL, etc?

------
pizza
[https://en.wikipedia.org/wiki/Aladdin_(BlackRock)](https://en.wikipedia.org/wiki/Aladdin_\(BlackRock\))

Was tickled by the allegory that could be made, upon reading this from
[https://en.wikipedia.org/wiki/Jinn](https://en.wikipedia.org/wiki/Jinn):

> _The Quran says that the jinn were created from a smokeless and "scorching
> fire", but are also physical in nature, being able to interact in a tactile
> manner with people and objects and likewise be acted upon. The jinn, humans,
> and angels make up the three known sapient creations of God. Like human
> beings, the jinn can be good, evil, or neutrally benevolent and hence have
> free will like humans._

~~~
acqq
I see no connection of that religious book and these particular Arab beliefs
based on the myths from around the 7th century with the article about the
BlackRock Inc.

I guess you're attracted by the part "can be good, evil, or neutrally
benevolent" but it's too little for my taste, the rest is more problematic to
be related. And can't most things "be good, evil, or neutrally benevolent"
anyway?

~~~
semi-extrinsic
If you clicked the first link given by GP, you would have seen that BlackRocks
investment platform is called Aladdin, who of course has a strong link to the
jinn (genie). Thus the connection.

~~~
StavrosK
Maybe the connection was that the platform was going to be the one that "took
the genie out of the bottle"? Any other alternative is more tenuous, I think.

