Tag Archives: trading

Jim Simons: A rare interview with the mathematician who cracked Wall Street

Pretty impressive. His strategy is to sift through immense quantities of data to find patterns and then exploit these patters until they stop working. However, the Renaissance Medallion fund since 1993 has been closed to to the general public and is only available to employees of Renaissance Technologies.

The computer-driven Medallion fund has made an average of 34% a year after fees since its launch over 20 years ago. Since the firm bought out the last investor in the Medallion fund in 2005, there’s no information on the fund’s returns since then. Out of the 148 months that elapsed between January 1993 and April 2005, Medallion only had 17 monthly losses. Out of 49 quarters in the same time period, Medallion only posted three quarterly losses. Medallion has had no loss-making years apart from its only one in 1989 during the 1993 – 2005 period.[23]

The fact his fund was able to make such great returns so consistently defies any statistical ‘luck’.

Here is a list of top-performing funds.

The George Soros quantum fund, also closed to the general public, is perhaps the only fund that comes close to matching the performance of Medallion. Although Quantum amassed slightly more money than Medallion, it had a 10-year head start.

But the left says the market is rigged, a scam, and a bubble. These returns should not be possible, but they are, and I doubt Jim Simon’s story is unique. There are probably hundreds of traders quietly making small fortunes in the markets, applying their intellect to find subtle patterns and inefficiencies in the sea of noise; for example, a Japanese trader that made $34 million, and others:

Using highly leveraged financial instruments such as futures and options, it is possible to turn thousands of dollars into millions in a short period of time. There are thousands of professional traders and fund managers who have achieved consistent, market-crushing returns, although they don’t go around bragging about it. The most famous examples are Warren Buffet and Jesse L. Livermore. Another is Richard Dennis, who in just ten years turned $1,600 into $200 million. Although the methods Dennis employed stopped working in the 80′s and 90′s, he was smart and savvy enough to find and exploit inefficiencies in the market to make an enormous windfall. There are many other stories like this 20-something penny stock trader. Although he cost his firm over $100,000 in a single day due to a botched trade, he turned his personal account of just thousands of dollars into hundreds of thousands of dollars in the span of six or so years. Jim Simons’ quant Renaissance Medallion fund has annual compounded returns of over 35% – turning an initial seed investment of a couple million into over $25 billion in just under three decades. Timothy Sykes, a well-known daytrader, turned his $12,415 Bar Mitzvah gift into $2 million. All of these examples show that, yes, you can get rich quickly trading. Mohammad’s returns were not impossible, as many immediately assumed.

Studies have also found that funds run by managers with high SAT scores tend to have better performance.

How High-IQ People Make Money In The Stock Market

Interesting article, obviously written by someone of above average IQ who has had success day-trading.

The market is 99% efficient, but that 1% allows smart people to make money consistently even as the left insists the market is rigged, a zero-sum game, or a bubble. The ‘blank-slate’ left believes that people can only succeed with the help of external factors – the nanny state, tons of practice, cronyism, nepotism, favoritism – never genes or innate talent. And what could be called reverse-Darwinism, the left wants more public resources to help the cognitively weak and inferior – not to advance the superior, who create economic value.

Anyway, back to the topic of trading, the empirical evidence suggests that high-IQ people are more likely to succeed at trading compared to lower-IQ traders. From the Journal of Financial Economics: IQ, trading behavior, and performance$

We analyze whether IQ influences trading behavior, performance, and transaction costs.
The analysis combines equity return, trade, and limit order book data with two decades
of scores from an intelligence (IQ) test administered to nearly every Finnish male of
draft age. Controlling for a variety of factors, we find that high-IQ investors are less
subject to the disposition effect, more aggressive about tax-loss trading, and more likely
to supply liquidity when stocks experience a one-month high. High-IQ investors also
exhibit superior market timing, stock-picking skill, and trade execution.

This doesn’t surprise me. Whether it’s writing, coding, chess, or even stock trading (which the left insists is random and rigged), at any cognitive endeavor it seems the high-IQ people keep coming out on top, even when controlling for practice and socioeconomic backgrounds. Practice does help, but just like no amount of practice will make a person with an of IQ of 90 grasp the subtitles of general relativity, no amount of practice will elucidate the subtleties of market behavior for the average-IQ trader. If the market is 99% percent efficient, it would be reasonable to assume you would need to be of the top 1% intellect (an IQ >135) to find the small inefficiencies. But as Gladwell Vs. Pinker & Charles Murray book sales show, there is a bigger market for fairy tales than cold-hard-biological reality. Tell people that IQ is just a social construct or that IQ, if it exists, doesn’t measure anything important, tell people that if they fail it’s because greedy rich people are holding them down…that’s the ticket to publishing success.

Related:

People Beat the Market Because of IQ, Not Conspiracies
Stock Strategies & ‘Fundamental Drift’
What the Mohammad Islam Hoax Says About Trading and Liberalism

Michael Lewis, Idiot

The inveterate whiner and liberal Michael Lewis it at it again, stirring a tempest in a teapot over ‘high frequency spoofing‘. He should stick to writing about baseball. It’s the only subject he is capable of writing about without sounding like a shrill ninny.

For brevity, I’m not going to discuss the ethics of trade spoofing. In reality, none of this really matters – a fact that comes to light up looking at the actual empirical evidence. The outrage over algorithmic trading, whether it be spoofing, penny jumping, ghosting – whatever, is predicated on the belief that such activity makes the market more volatile, and that the ‘little guy’ is being exploited in the process. But in reality thanks to increased trading volumes, spreads between the bid and ask are thinner than ever, meaning cheaper executions to enter and exit positions, as shown below:

As for crashes, why can’t the left accept that the May 2010 Flash Crash was such an extreme anomaly, and that it’s impossible to infer a ‘long standing’ trend from it. The ‘flash crash’ was not a symptom of anything, nor a sign of anything. It just happened, and was quickly over. That’s it. Sometimes a cigar is just a cigar. Sometimes a crash is just a crash. People get scarred, they sell, prices go lower, more people get scared…repeat. The end. Consider the empirical evidence…if the markets are so vulnerable to this nefarious activity, to invoke the Fermi paradox, why aren’t there more flash crashes? Why has there only been a single event like this in over…five (and counting) years? You would think that if all this high-frequency stuff were a big deal the market would be gyrating 1-4% every day, but it’s not. In fact, since 2011 market volatility has been persistently low. A ‘big’ sell-off these days is half a percent. Whatever is going on behinds the scenes is so trivial in the grand scene of things that unless one pays very close attention to the market-microstructure, there is nothing aberrant. And then keep in mind similar crashes to the Flash Crash occurred in the 90′s, specifically in 1996, 1997, and 1998, and then there were similar crashes in 1987 and 1989, long before high frequency trading became a big deal. Markets have been ‘flash crashing’ ever since the existence of markets. Another problem is that crash-models fail to take into account fundamentals, which prevent the market from falling below a certain threshold. You cannot have a continual feedback loop if such a loop results in prices substantially deviating from the underlying fundamentals. Someone always steps in and ‘rights’ things.

Cassandras like Michael Lewis need to stir unnecessary outrage and fear to make a living and to bring attention to their leftist causes, and that’s why it’s important for bloggers such as myself to debunk the left’s nonsense since its easy for people to otherwise be mislead .

Related: Misconceptions About Algorithmic/High Frequency Trading