I hate reading comments like this. They’re intellectually lazy and overly cynical. The industry is not a fraud. Yes, shady things happen. But there’s a lot of legitimate research done by capable people.
I used to do research in this industry and I can tell you that, actually, there are a lot of opportunities for novel research based on huge financial details which haven’t been noticed.
What is your experience, that you write off my own experience as well as entire industry, as being illegitimate? Based on another comment you made in this thread it looks like you’ve also worked in the industry, so did you seriously never come across legitimate research efforts or are you just not mentioning those?
I worked on a quant research team at a well known fund. Without going more into details, I grew up around people making 20 million a year at funds. The real money is made when a ceo tells you how the new company innovations and business lines are coming along. The long term bets on companies is where big money is made. Flipping stocks all day at the alt data/quant funds is overrated and a race to the bottom. When everyone has the same data it’s worth nothing. These places are doing well now because markets are booming, even a turkey can fly in a tornado. Don’t get confused
The top quant funds perform exceptionally well even through bear markets. That's a fact and a matter of public record. Likewise the funds which rely on alternative data the most aren't even primarily quantitative in their strategies, so you shouldn't be grouping them together.
I don't know where you worked, but please stop perpetuating the myth that everything in finance is shady business in smoky rooms. Contrary to what you're saying, a lot of the alpha generated at the best firms comes from novel approaches to data analysis, not the uniqueness of the data itself.
There is real ingenuity in research which translates into consistent alpha. I'm not going to argue it's literally the maximally valuable way to generate returns in finance, but you're dismissing it entirely. Not everything in trading is relationship building and trying to curate data no one else has.
There is room to combine otherwise public datasets together to find novel insights, and this is frequently done.
Sure the quant funds make money, a few people do well, lots of engineers make 500k. Places like Pimco, Goldman, Baupost Group, Fidelity, etc. the traditional finance firms work differently. For example, the bond market which is massive compared to equities, was rigged like 30 years ago by Goldman and Pimco to stop computerized trading of corporate bonds. What this did was keep the bond trading in the hands of a few firms, the tops of whom all pay themselves 10-50 million a year.
Equities is being run over by ETFs, none of these funds have that much alpha, HFT was just some stupid inefficiency firms realized that could do in like 2008, by 2019, HFT is barely profitable. Whenever these firms make money from fast trading, what they are really doing is stealing money from pension funds and peoples 401ks. Clipping and front running trades shaves a little from the price and puts it into the pocket of some "genius" at Two Sigma. You can shout all you want about how intelligent these people are, but the whole thing is crooked. Secondly, watch how fast these places go out of business when the market tanks. Massive bull runs and "prestige" have these guys claiming to be kings of the world, but really, the financial industry is about raising a ton of investment money and figuring out how these fund managers can siphon it off into their own pockets. Which is why ETFs are so popular now.
When Two Sigma starts making too much money, the sec starts knocking on their door. Because its obvious theyre exploiting the market and extracting wealth. So they dial it back, and keep just some. This kind of thing is never talked about in public, but it happens all the time. Constant negotiation between which trades are ethical between computerized traders and the US government. All that 50 Billion in wealth really came from Goldman. Go look on linkedin, all the top people there jump between TS and Goldman.
I could go on and on about the scam of quant, I know the industry intimately.
> Equities is being run over by ETFs, none of these funds have that much alpha, HFT was just some stupid inefficiency firms realized that could do in like 2008, by 2019, HFT is barely profitable. Whenever these firms make money from fast trading, what they are really doing is stealing money from pension funds and peoples 401ks. Clipping and front running trades shaves a little from the price and puts it into the pocket of some "genius" at Two Sigma. You can shout all you want about how intelligent these people are, but the whole thing is crooked. Secondly, watch how fast these places go out of business when the market tanks. Massive bull runs and "prestige" have these guys claiming to be kings of the world, but really, the financial industry is about raising a ton of investment money and figuring out how these fund managers can siphon it off into their own pockets. Which is why ETFs are so popular now.
This is entirely false. I'm not sure where you think you're getting your information from, but it is not accurate. Most highly successful quant firms didn't get that way by raising a ton of assets. They got that way by turning a small amount of seed money into a lot, via returns.
> When Two Sigma starts making too much money, the sec starts knocking on their door. Because its obvious theyre exploiting the market and extracting wealth. So they dial it back, and keep just some. This kind of thing is never talked about in public, but it happens all the time. Constant negotiation between which trades are ethical between computerized traders and the US government. All that 50 Billion in wealth really came from Goldman. Go look on linkedin, all the top people there jump between TS and Goldman.
This is also just absurdly untrue. Nobody is knocking on Renaissance's door when they make too much money, if they did, they wouldn't have been posting the kinds of returns that they do.
You're talking like you're familiar with the industry, but so am I. And basically everything you've said here is just completely wrong. Maybe you worked at a bad firm or something, I don't know. But there are players here who are consistently making large amounts of money from statistical arbitrage, and high frequency trading that has nothing to do with exploiting inside information. And no, the SEC is not knocking on anyone's door for "making too much money".
The top quant firms also get a fair amount of internal corporate data that lets them properly populate their models.
Every model has significant biases and weaknesses. If a model survives more than one up or down cycle, it's generally a sign that the model is based on leaked data and not on the actual analytic prowress of the firm involved.
But I'll humor your implied point: LCTM's failings have nothing to do with the core thesis I'm rebutting, which is that the only value in financial trading is provided by shady backroom dealings.
I'm not as cynical as that guy. I don't think quants are a "scam" or whatever. However, I do think the the top funds represent survivorship bias. Everybody's a top fund, until they aren't. As for RenTech, the fact that Simons stepped down in 2008 says maybe things weren't all so rosy behind closed doors.
> The industry is not a fraud.
> there are a lot of opportunities for novel research
These are not mutually exclusive.
When presented with the opportunity to do either insider trading (and easily getting away with it) or paying for novel research, which will most managers choose? Why not choose both?
> What is your experience, that you write off my own experience as well as entire industry, as being illegitimate?
You hardly need this one person's data point. The massive success of passive investing is all the evidence anyone needs.
(I also worked in Wall Street just before and during the financial crisis, and my experience is consistent with the industry being more fraud than not fraud. I absolutely am not implying that you yourself didn't produce value or that no one is honest, but value/honesty are not the norm.)
Speaking as a former corporate lawyer...he's not wrong.
Executives have been leaking internal data to trading firms for decades. The trick is for the analyst to come up with some plausible explanation for why they reached the conclusion to buy (or sell), which is generally easy to do.
Sure, but you're not describing the way hypotheses are developed at DE Shaw, PDT, etc. I'm not debating that happens at places which focus (even if only ostensibly) on fundamental analysis.
Strongly disagree. Sell-side research and models, which are what's discussed in this article, are strictly monitored for material non-public information (MNPI). Further, most institutional investors now are closely monitoring the information flow in and out of their firm and what they can discuss when in meetings with corporate clients so that they don't have the SEC breathing down their necks for potential inside trading issues. The narrative you're describing pretty much existed 10+ years ago, but post financial crisis it's a different game (which likely has hit hedge fund returns imo).
Finance is about personal relationships and private information. That’s how investing has always worked. It’s cynical and the public likes to believe in the math geniuses on Wall Street, who don’t get me wrong, they do make money, but the real money is made behind closed doors
I was one of those people on Wall Street and it doesn't work like that to the extent you're thinking anymore. In my experience, relationships with consultants at big name firms could offer better channel checks, but pretty much no one is straight up hearing from a CEO that they had a blow out quarter with X, Y, Z client wins before that info goes public. Too many people have too much to lose.
You see the same in in M&A, often times the bank that wins the deal is the one where the managing director knows the people taking the company public. Its about relationships. Same thing with private equity. The equity markets are also miniscule compared to the bond market, where this kind of thing is even more widespread.
The banking side is a different topic than the post at hand here. No doubt in my mind that banking functions as a relationship driven business - you're right there.
Indeed. And while those financial numbers may show the truth if you squeeze it in a certain way, they're epically useless in the long run. 2 examples for my non financial friends:
Tesla has had negative cash flows for 5 full years until 2018. It posted a profit of any significance for the first time in a long long time last quarter. If you look deeper, you know that everything is wrong financially with the company despite Elon being celebrated as a genius engineer (debatable IMO, but not relevant). The stock just hit all time highs yesterday.
Apple started the year by lowering revenue guidance. And they also folded their fingers and flipped the entire financial analyst industry one massive bird when they said they wouldn't release iPhone sales numbers (their most important product and probably 99% of revenue / margin / income growth factor). Stock is up 104% this year.
So yeah, the entire edifice is made of shit and only the ones closer to the industry can see it. Even people working inside don't benefit from this shit moat for the most part and wish it gone.
Oh please. We all know that scam. Unless you can create magical math out of thin air that produces a positive npv after negative fcff for multiple years, it is complete and utter bullshit. Take it from someone who has spent way too much time doing a goal seek to match up to market expectations.
When in 2014, we set out to evaluate tesla, no one in the industry saw 5 full years of negative cash flows. If they did, they certainly didn't show it in their models. And the stock price certainly made no sense if people with shorter time horizons were holding onto it.
So one of 2 things is true:
1) the market is all knowing and it sees out to a time horizon where tesla would have positive cash flows and discounts it absolutely perfectly. In which case, the market didn't see Bear Stearns or 2008 coming, so spare me the clairvoyancy pitch.
2) The entire thing trades on fairy dust because vast portions of the market work on self fulfilling prophecies of both big money brokers, and idiot retail i.e. in both cases, they believe the stock will go up based on false assumptions and even worse models and hold on for dear life as the fed pumps the market into the next euphoric orgasm.
1) It's a visible hand now. Adam Smith was a while ago and much has changed across economics. Enough that what you'd think are timeless truths have also become false.
2) We have a name for this hand - the federal reserve of the united states of america. If you saw the last Mr. Robot season, there's an episode where Mr. Robot says "behind every great fortune lies a great crime, this is the corporate motto of these United States". He was only slightly wrong. Behind all great fortunes since the advent of central banking lies the hand of the federal reserve.
Or 4, with capital deepening and lowering long term GDP growth (and the impact on interest rates that has), asset values trend upwards ever so slightly over time. And of course you have bubbles of valuation.
Nah I worked on that credit card data. Once everyone has it the value disappears really fast. It’s a sexy way to do analysis, but within a few years it will just be another data point. The big money is made in understanding how a companies new innovative business arms are doing and where the promise of those lays. That’s where talking to the ceo tells you what’s going on. The big money is made in long term bets, not short term credit card predictions
The money movers buy the "anonymized" location data of the whole US population, de-anonymize the CEO (easier than for a regular person), and then see what his movement says (taken a plane to a competitor office? merger perhaps?)
The article isn't talking about "huge financial details", whatever that might mean. It is about projecting information from alternative sources before the official numbers are released.
