Reinventing Hedge Funds

Two months ago, I spoke at IBM's Think 2019 Conference with iOLAP's Chris Jordan. Our talk was Gaining a Financial Edge through Fast Data and Analytics.

 

 

The crux of our presentation was that high-performance computing and advanced technology stacks are fundamental to today's trading strategies.

Earlier this week, IBM released a commercial we shot together about how IBM's Integrated Analytics System (IAS) is helping us re-invent hedge funds.  Check it out.

 

 

via IBM Analytics

Think of it this way: 

Each generation of traders finds new ways to play the game and to generate Alpha (the excess return generated by manager skill, rather than luck or excess risk). As soon as enough people adopt a strategy (or figure out a way to combat it), the edge begins to decay.

When computerized data became available, simply understanding how to download and use it generated Alpha. The same could be said for each later evolution: the adoption of complex algorithms, access to massive amounts of clean data, and the adoption of AI strategies.

Each time a new shift happens, traders pivot or fail – it's not that active trading stopped working – it's that the tools and styles necessary to play that game evolved.

We use a similar concept we call "Active Switching".  Instead of simply trying to pick stocks or markets, we use advanced technology and techniques to choose markets, techniques, risk levels, and allocation strategies. Further, we use Active Switching to make many decisions, great and small, that together allow us to build portfolios that adjust themselves to changing market conditions.

 

Playing a New Game

 

Confusion is the catalyst to most trades.  What that means is the ability to parse information ... to create a contextual map of meaning and figure out where there's signal and noise ... is the new table stakes for playing that game.   ~ Howard Getson

 

Historically, most active traders don't beat the S&P in any given year ... and even less beat it with any semblance of consistency.  But those that do – the ones that have been doing it for long enough that it's not chance ... exercise a willingness (and a skill) to adapt quickly. 

One of Charles Darwin's best-known concepts is: It is not the strongest species that survive, nor the most intelligent, but the ones most responsive to change.

While computers have made information accessible to everyone, they've also created a massive asymmetric information advantage for those who have both the access and the skill to best use the massive amounts of data now available.  This is more complicated than it seems.  You need the information, the technology, the process, and the people.  There is so much data available now that figuring out what to ignore is probably more important than what to use.  Likewise, the ability to ingest, clean, validate and curate the data is a huge hurdle that most can't clear.

 

 

Even with those skills, it's harder than ever to take advantage of inefficiencies (edges) than ever before.  The edges are smaller, more fleeting, and surrounded by more volatility and noise.  It's like finding a needle in a haystack.  That being said - finding a needle in a haystack is easy when you have a metal detector. 

That's where A.I. has come in for us. We use A.I. to develop algorithms, to analyze markets, and to create meaning where humans can't find any. 

 

 

We live in exciting times.  Onwards!