Hack the market

The always excellent Wilmott Magazine has recently posted a series of articles by Ed Thorp (pictured) in which he describes his experiences developing and evolving a statistical arbitrage product. Part I provides some insights into his current operation, revealing that he maintains a dollar-neutral portfolio as I’d discussed in another post, they trade some 1.5 billion shares / year, and that they limit position sizes to 2.5% on the long side of the portfolio and 1.5% on the short side. In Part II, he explains why a stat arb system is considered an “arbitrage” and how, with the help of a talented team and led by the insights of Gerry Bamberger, they developed the first iteration of a stat arb product. Part III details the evolution of the system from a set of dollar-neutral sector-oriented portfolios to the more general sets of portfolios generated through statistical factor analysis. He concludes with some anecdotes including the emergence of David E Shaw. Very recommended.

I came across this article on a Go-playing program and thought it was interesting. Particularly this aspect of it (from wikipedia):

One major alternative to using hand-coded knowledge and searches is the use of Monte-Carlo methods. This is done by generating a list of potential moves, and for each move playing out thousands of games at random on the resulting board. The move which leads to the best set of random games for the current player is chosen as the best move. The advantage of this technique is that it requires very little domain knowledge or expert input, the tradeoff being increased memory and processor requirements.

Professor DeLong points out that Emanuel Derman has begun posting lecture notes to classes he’s teaching as part of the Columbia Master’s of Financial Engineering. If you’re even remotely interested in financial engineering or algorithmic trading, then you should read Dr. Derman’s engrossing book “My Life as a Quant” as it gives a unique and personal perspective on the explosion of engineering as a discipline within finance. I haven’t studied his notes carefully yet but a cursory examination suggests they look very worthwhile.

I recently found in my inbox an invitation to study for a Certificate in Quantitative Finance which is, I’m sure, a great program. But it’s pretty pricey and any quant should be aware of costs! Laughing in the dark might be a reasonable alternative to shelling out for a more structured offering…