The Man Who Solved Market How Jim Simons Launched The Quant Revolution

Most of what I read is scientific/academic papers and over time I’ve developed the taste to enjoy reading and scrutinising papers. It becomes natural to me to read and at the same time question everything being read. Is it true/possible? Are they making this up? Is there other way? etc. I enjoy reading non-fiction as I learn new things and it fits with my natural mode of reading. Using it on this book, make it’s less enjoyable as it appears that the author filled in a lot of blanks with imaginations. The descriptions of characters or events, beg the questions of how do the author know all these things e.g. tone of voice in private phone conversation. No amount of interview would unearth something like trembling in his voice, beautiful dark blue eyes, stunningly red curly hair, handsome so and so. It sounds dramatised and reads like a novel. I can’t help but questioning the authenticity of it all.

Even though the book was billed as non-fiction, if you read it as if it’s a fiction based on true story, you would enjoy it a lot more. Let the guard down a little and it becomes a real entertainment. In fact, it’s a true page turner, I can’t seem to put the book down finishing the whole book at around mid-night-way way past my bedtime. It’s like a good thriller novel that you just can’t stop until it’s really done.

A couple of things I learn from the book.

Hedge fund, a loosely defined term for private investment partnerships that manage money for wealthy individuals and institutions and pursue a variety of strategies, including trying to hedge, or protect, themselves from losses in the overall market.

Medallion performance 

Funds make money through future contracts track commodities, currencies, gold, stocks, bonds. They predict trends and make bets; if predictions are right, they will make money.

Broadly speaking there are two kinds of investment

Fundamental investing

They comb through financial reports, company annual reports, public statement, interest rates, economic trends, world events that influence market, all kind of information that may help them predict trends. If they have particular market-influencing information that nobody has, they have an edge.

It was self-evident that the surest way to score huge sums in the market was by unearthing corporate information and analyzing economic trends. This is a traditional and conventional way in Wall street and Buffet’s way.

Technical investing

They treat market like casino. They don’t care about company fundamentals. Being a house you don’t need to win all the times, you only need to win slightly more than half (all games in casinos are designed to tilt the odd slightly in favour of the house). If there’s large enough number of bets, over all and over a period of time the house always make money (statistical rule of large number applies). 

The gist of it is they poured gargantuan amount of data into machine learning computer. It picks nuance signals that can predict short-term trends and the computer makes bets based on rules that the funds set up to maximise profits.

As this is a machine learning technique, it can’t justify why they make bets that way so essentially it’s a series of actions based on black-box algorithms.

Medallion hoped to develop detailed, step-by-step algorithms to identify trends that result from hidden actors influencing the market.

Speech recognition and stock market

When we speak into computer or mobile phone and it transcribes, they don’t really understand what we say, they hear us mumbles and they use Bayesian statistics, rule of probability that this word usually followed by that word or this word signifies or increases the chance of that word following.

They feed their computers with enough data of recorded speech and written text to develop a probabilistic, statistical model capable of predicting likely word sequences based on sequences of sounds. Their computer code wouldn’t necessarily understand what it was transcribing, but it would learn to transcribe language, nonetheless. In mathematical terms, sounds are viewed as the output of a sequence in which each step along the way is random, yet dependent on the previous step—a hidden Markov model. It is a partially observable model, where the agent partially observes the states. This model is based on the statistical Markov model, where a system being modeled follows the Markov process with some hidden states. In simple words, it is a Markov model where the agent has some hidden states.

Markov Models

Markov model is a stochastic model which is used to model the randomly changing systems. The assumption is that the future states depend only on the current state, and not on those events which had already occurred. These equations can make predictions using data that appears random; weather-forecasting models, for example, use stochastic equations to generate reasonably accurate estimates.

A model is a simplified version of reality, like a street map that shows you how to travel from one part of the city to another. If you got them right, [you] could then use the rules to predict what would happen in new situations.

Technical investing or quantitative investing use these principles in stock market, nuance signals are detected and they increase the likelihood of certain event to follow.

It’s like a movie - Money ball. To assemble a basketball team, you need to pick and buy players. There are two ways to it. First, scouts who rely on their intuitions, experiences to pick perfect players for the right price. Second, a computer in which a large amount of player data are contained and statistics to do the tricks.

Medallion staff said that they don’t/can’t predict market. They predict human behaviours in response to market movements and systematically exploit that in a gigantic scale to their benefits. Essentially, they make money from the reactions people have to price moves.

The alternative hypothesis of it all is it’s all hokum, they are all fraud. They make money because of inside information, nobody has access to. What are the chances that they’ve continued to have monopolised access to unique information nobody else has for over 30 years. I’d say extremely unlikely.

Ethics

These people make gazilion, but what do they actually contribute to society? As a profession, do they produce anything? If it’s a massive casino that they keep winning, it’s just a zero-sum game. They make money because there’re somebody else lose money to them.