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Algos and Ditch Your Index Funds


Dan McCrum, FT Alphaville, Puny human analysts to be crushed by algorithmic steamroller, here.

The world’s most successful hedge fund strategy is both the most secretive and the one that you could never invest in: Renaissance Technology’s Medallion fund. The fund ignores the mainstream finance literature, preferring to scoop up experienced cryptographers and mathematicians required to sign intimidating non-compete clauses, and it is willing to trade signals in the noise that work even if it doesn’t understand why.

According to II, however, new systems on offer to analyse the flood of news headlines and tweets can cost from $5,000 to $20,000 a month, less than the annual pay of a junior hedge fund analyst.

We’re reminded of AQR, the hedge fund firm built upon a former Goldman Sachs prop desk that has become an all-round quant-based asset manager. Each year it offers a $100,000 prize to get an early look at unpublished papers from the world of academic finance.

S.L. Mintz, Institutional Investor, Analysts Beware! A Machine Has Its Eye on Your Job, here.

AQR Insight Award 2014, here. Previous winners, here.

You are invited to submit a paper for the 2014 AQR Insight Award. A $100,000 prize will be awarded to the most important unpublished finance paper that provides significant, novel, practical solutions for institutional investors and financial advisors. The judges will have discretion to select up to three papers to share the prize.

Dan McCrum, FT Alphaville The rate exit, Credit Suisse edition, here.

The Swiss bank has followed the lead of UBS in deciding that core fixed income trading is just too expensive, now that the whole flight to safety trade is over and lucrative over the counter business is dwindling.As the FT reported last month:

Regulators around the world have raised capital requirements in the wake of the financial crisis and this, combined with subdued markets and a move towards central clearing, has prompted banks to rethink how they run their debt trading.

Matt Levine, Bloomberg, Levine on Wall Street: Ditch Your Index Funds, here.

Stock-picking is back

Actively managed mutual funds have been so maligned for so long that I guess they were due for a good year, and so Reuters reports that “Some 57 percent of U.S. funds run by active managers are beating their benchmark indexes this year.” This seems to be attributable to the fact that stocks are moving less together and doing more of their own thing: Implied correlations “have fallen to their lowest since October 2007 after peaking in 2011. “It’s a stock-picker’s market,” as they say, and boy do they ever say that. (Not Reuters, I mean, just the generic “they.” Though Reuters too.) One lesson here is that investing success is built on a series of meta-skills and meta-judgments: Sometimes it is nice to be able to pick stocks (or to pick fund managers who pick stocks), other times wisdom lies in indexing, and knowing in advance which times will be which has obvious value.

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