The are various models from textbooks now that seem (or are presented as) too naive to be applied to financial markets, and too slow (eg gradient descent/expectation maximisation) on 1980s computers with "big data".

And then, the academic perspective is that prices should be modelled as random walks, though you may talk/learn about things such as "trend" and volatility. Suggesting that hidden variables/states/transitions can be learned from historical data is usually considered pseudo-scientific.

Meanwhile it so obviously worked for RenTec, with relatively miniscule computing capacity, for decades.

Repeating the academic perspective just seems disgenuine. If prices are not random walks, then financial markets are actually games.

> And then, the academic perspective is that prices should be modelled as random walks, though you may talk/learn about things such as "trend" and volatility.

The math involved in finance and economics always seems way behind that of other fields. The problem is that the other fields with more advanced math are so deep in theory that the people working in those areas are often either unaware of the potential real world applications of their work, or they are simply not interested in it (I’ve noticed there seems to be little overlap between the type of personality inclined to explore abstract theories as its own reward and the type of personality that prefers to apply existing knowledge to a real world problem).

> Suggesting that hidden variables/states/transitions can be learned from historical data is usually considered pseudo-scientific.

I mean, there’s a definitive answer to the question of stock market predictability. Unfortunately, it’s also uncomputable: if the conditional Kolmogorov complexity of a stock price time series given relevant auxiliary data is less than the size of the time series data (roughly speaking), then the stock price is predictable to some degree. Otherwise, it’s not.

I would be extremely skeptical if anyone claimed that stock price is truly Kolmogorov-random. However, I also think no single trading group’s algorithms (and data) are sufficiently more advanced than any other group’s to the point where algorithmic arbitrage is obvious to the market (or maintainable over a sufficiently long time period). I would not be surprised though if a sudden ML breakthrough destabilizes the entire market at some point in the near future when one group does in fact realize a step function improvement in their algorithms.

I think this is one of those cases where conflating "unpredictable" with "random" breaks down. As a matter of simplification, we treat many unpredictable processes as random if making the process at least somewhat predictable is sufficiently intractable. While this can change very quickly e.g. breaking encryption algorithms, for many data models the gains in making a process less unpredictable are more incremental and are largely dependent on having both better math and more efficient compute.

Unpredictability is as much a computational intractability frontier as it is a math problem. We know how to do approximately optimal prediction, but if you have to throw a supercomputer at the calculation and wait until the heat death of the universe to get an answer (which is the essential reality) then it has no value. But if you can grind out small improvements at the prediction frontier on a tractable amount of computing hardware due to algorithm advances and mathematical improvements in more narrow cases, then you have an almost unbounded greenfield to work with and these improvements will generalize well across diverse markets.

Predictability is defined in terms of probability distributions, and a price X is typically defined to be drawn from something like Xₜ₊₁ ~ Xₜ + N(μ,σ). The purpose might be to quantify some property of μ or σ or something like that. It means "X₀.ₜ does not hold any information about Xₜ₊₁". The assumption is that any price move reflects new information. It might be a reasonable model for various purposes.

But if this model was "true", RenTec would not work, and the "efficient market hypothesis" is invalidated. Which seems plainly obvious.

Ok, so if the market is not efficient, then it's actually a game (poker-like?) and zero sum. Academically, unthinkable thoughts.

> smart people only caring about getting richer.

Why is this a bad thing?

To educate a man in mind and not in morals is to educate a menace to society. -- Teddy Roosevelt (I'm speaking generally and not saying that Jim Simon was bad)

You don’t know what people do with their money so how can you claim they lack morals?

If they get the money in an immoral way, then we can disregard what they do with it afterwards.

The social mechanic is basically that some people accumulate wealth extracted from the value produced by other people's labour.

Is it ethical to use other people in that way? What kind of person can live a life like that?

One of my favorite episodes of Acquired. Truly inspiring.

I think its safe to say that whatever RenTec is doing, they are not predicting the market...Since they sold 1M shares of NVDA at $699....

https://hedgefollow.com/funds/Renaissance+Technologies/Perfo...

https://hedgefollow.com/funds/Renaissance+Technologies

When I see prestidigitator performance I can't explain, I just don't go directly to assume it's real magic...

Here are 20 funds with a cumulative performance better than RenTec for the last three years...Did they also crack the market?

https://hedgefollow.com/top-hedge-funds.php

For three years? Is that a serious comparison?

And yeah, it’s not remotely surprising they’ve made trades like selling NVDA at $700. Judging a fish by its ability to fly etc. RenTech doesn’t work by picking stocks based on industrial trends or anything — as far as we know that sort of stuff is literally not even an input.

Good enough to prove they can't predict the market...

“Predict the market” is an insufficiently defined phrase to argue over. Strictly speaking, of course they cannot “predict the market.” You’re describing a time machine or a crystal ball, and no, they don’t have either.

What they can do, as demonstrated consistently since approximately their founding, is eek out tiny, repeatable edges on the market and exploit them at rather large scale in a variety of market conditions for dramatically longer periods than anyone else.

That is in practice the most consistently-slightly-correct market prediction anyone has ever achieved.

But not for their other customers?

"Renaissance Hit With $5 Billion in Redemptions Since Dec. 1" - https://www.bloomberg.com/news/articles/2021-02-07/renaissan...

Maybe then it's real magic. Everybody knowns The Goetic Circle of Solomon cannot have more than 72 different demons. :-)

Are you familiar with "Fooled by Randomness" by Taleb? Here is one of the simple tricks discussed there. The details are of my own writing, the mechanics of it are as described.

How you can easily implement a Hedge Fund to beat the market and become a rich investment manager, that will show up every day on CNBC.

Step 1: Choose with a randomly 20 stocks from the hundreds in the NASDAQ and the SP500. Do this hundred times and create 100 funds.

Step 2: Let the funds run for a while and keep closing the worst performing

Step 3: At the end you will end with one or two that beat all market indexes

Step 4: After 3/5 years publish a full announcement page on the FT and Wall Street Journal, explaining how your Hedge Fund has consistently beat the market.

Step 5: Invite people to give you more money to manage, due to your amazing expertise. Make sure to charge a 5% management fee. Show up on CNBC once in a while for free, for increased exposure.

Step 6: Setup a Foundation to make sure you enjoy your billions tax free...

Another way to do, if you morals are let's say, more flexible, is setup several funds, trade your main ( profitable fund) again the other funds ;-)

I could do this all day...

Okay, so is that what you’re claiming they’re doing?

If so, please share your evidence.

If not, then I’m not sure what is the point of this conversation.

There are plenty of hypothetical ways to beat the market and they make for the same quality of conversation as a drunk uncle’s “brilliant” day trading strategy that he just needs a few bucks to execute. Carry on all day if you wish, no one will be better off for it.

> Okay, so is that what you’re claiming they’re doing?

I am not claiming that is what they are doing, but I offered two real strategies of what they could possibly be doing.

The most detail ever disclosed by Renaissance Technologies is probably this: https://www.hsgac.senate.gov/wp-content/uploads/imo/media/do...

Does not mean all details are there.

> If so, please share your evidence.

:) If I crack the Renaissance Technologies fund algorithm I don't think you will be the first one I will notify...:-)

However, I know where I would start to investigate. The employees of the fund, do some of biggest political donations in the USA. Astute investigative journalists could start to look there. Are they doing to avoid scrutiny of their activities? If you cracked the market why such a high level of donations? Philanthropy? Then open your fund...

Interestingly they also hedge their political donations: https://www.opensecrets.org/orgs//summary?id=D000022219&cycl...

And know how to push the limits:

"Abuse of Structured Financial Products: Misusing Basket Options to Avoid Taxes and Leverage Limits": https://www.urban.org/sites/default/files/publication/23081/...

> they make for the same quality of conversation as a drunk uncle’s “brilliant” day trading strategy

Sure...Let's stay with the alternative most in this thread are passively accepting: "They cracked the market"

> they also hedge their political donations

...this is another misintepretation. You're looking at a list of donations by employees, who presumably don't fall under the same political persuasion. We know this for a fact given that Jim Simons and Robert Mercer are themselves on opposite ends of the spectrum (and each was very politically active).

Anyway yeah, I'm sure RenTech is just lacking scrutiny. Surely no astute investigative journalist has thought to look their way.

Financial investigative journalism is dead in the US. Journalists are paid badly, and work for the multinationals they should scrutinize.

In Europe the FT tried to pretend they were still a respectable financial publication, but shit their pants when the German financial regulator threaten them. They learned to be quite since...

"Germany’s financial watchdog BaFin responded by launching a probe into the reporting and whether — as Wirecard alleged — it was an attempt at share price manipulation. " - https://www.ft.com/content/27872df6-b496-11ea-8ecb-0994e384d...

https://www.ft.com/wirecard

If you're accusing RenTech of something, be direct about it.

This is a typical conspiracy theorist style. Always pointing out "look there..." without ever saying what they're talking about, because there is actually nothing there.

> If you're accusing RenTech of something, be direct about it.

Oh now trying to explain the algos, of a fund of 300 employees, who never has losses, and makes some of the biggest political donations in the US...Is accusing?

What happened to intellectual curiosity? Don't look up?

> Always pointing out "look there..."

There is plenty where to look...

https://www.reddit.com/r/hedgefund/comments/18johku/medallio...

"Democratic donor built up vast $8bn private wealth fund in Bermuda" - https://www.theguardian.com/news/2017/nov/07/democratic-dono...

13Fs are only filed quarterly. RenTechs positions are held very short term.

And 13f's only show their long positions on that day, delayed by up to 45 days. And from my understanding intraday was primarily what medallion did, 1 day to 2 weeks. No high frequency, no long term.

IIRC, their ELI5 testimony to the Senate (not the one you linked elsethread) is that RenTec's long-term strategy is to make a small profit over many many transactions. Versus buy and hold, or value invest, or whatever.

I don't understand anything about finance. That said, it sounds to me that RenTec is (or portraying themselves as) a classic volatility based hedge fund.

(A good friend is a hedge fund trader. He has tried to explain the maths to me a few times. Something something about Brownian motion, NPV, predicting herd migration. Alas, I am but a simple bear.)

But all their data collection gives me pause. I do think they they're better at spotting market signals. Like using FourSquare check-in location data to predict retail performance. Like using a VPN to spy on users to spot emerging competing startups.

My pet theory is that RenTec's play is restraint, to be patient slow capital. Even though they (probably) have data for bonanza predictions, like your NVDA example, they some how have the discipline to eek out modest profits, preferring consistency over riding the tiger.

Sometimes I think - what if all the smartest people that work on purely commercial things, had rather spent their time on solving problems in medicine, etc.

Of course, some will argue that

A) These people wouldn't have been equally motivated to work on such problem, compared to the ones that make them wealthy.

B) Some of the investment folks are contributing to the actual sciences, by fronting them with money.

But, still, I can't help but to think what a brain drain the finance industry is. You take some of the smartest and most motivated people out there, and make them spend all their energy on vacuuming pennies off the market, or identifying commercially successful companies.

It's been an utter cultural disaster. We've missed out on so much original science and progress because these smart idiots threw away their talents on building machines to game the casino, when they could have made game-changing contributions to fundamental original research.

Imagine if Shannon, Turing, Von Neumann, Einstein, and Dirac had done this.

Yes, they put some money back, but not nearly enough to compensate for the damage.

The real disaster has been normalising this kind of "success" as the best of all possible achievements, when in fact it's spectacularly cheap and unambitious compared to the goals of previous generations.

If anyone thinks I'm overstating the heresy here, remember - a financialised economy is optimised for short-term gain, not long-term development.

The flip side of "investment" is an economy where hundreds of millions are bankrupted by health insurance, where rents are unaffordable (never mind property), where workers are treated like spreadsheet assets and not like people, where fraud is endemic, where many people are putting off having kids because they literally can't afford them, where planes fall out of the sky, and where the entire machine regularly demands government bailouts because it's stuck in a manic depressive cycle of overconfidence and opportunism followed by collapse.

That's not even looking at the incredibly toxic political effects.

>We've missed out on so much original science and progress because these smart idiots threw away their talents on building machines to game the casino, when they could have made game-changing contributions to fundamental original research.

The vast majority of people who succeed in finance are very ambitious; if finance wasn't an option they'd just have found some other way to make money, not suffer as a peon doing fundamental research for mediocre pay in a lab somewhere. Just be glad they didn't go into politics where their ambition could have done even more damage.

So, are we saying that Jane Street is evil because they specifically target smart people and pull them into finance?

Hate the game, not the player.

Fair :-/

I mean… look who they hired.

Eh, it's hard to call it much of a "brain drain" when getting a research job is so difficult. There's no shortage of smart people interested in working in research for less than they'd make at any professional role, much less in the highest-paid industries.

PhD programs pay basically nothing, are selective, require candidates to jump through all sorts of hoops and still have no trouble filling out. Later on, becoming a professor—or some other sort of researcher with similar scope, autonomy and funding—is basically impossible, harder than making a bunch of money in quantitative finance. And yet each opening has hundreds of realistically qualified applicants. (Realistically qualified in the sense that they'd be able to do good research, anyway.)

Ya, "brain drain" is probably not the right metaphor. But you get the gist: Smart people have more opportunities in finance.

As you know, funding for academics, scholastics, and basic research has been on a decades long decline. The West's investment in knowledge production peaked in response to Sputnik. As the Cold War wound down, neoliberalism and the "peace dividend" replaced that commitment.

Too bad.

Maybe climate crisis, our new existential threat, will be another Sputnik moment.

>disheartening episode about smart people only caring about getting richer.

Didn't Simons donate prolifically to math education?

> Basically algorithms from signal processing applied to huge volumes of historical and current data to determine buy and sell signals.

Oh, so that's why the incessant Twitter crypto scam ads about "THE STRONGEST SIGNALS", it was an already established term that I didn't know about.