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Comment by bluetwo | Hacker News Reader

That all sounds awesome and impressive, but I have the same problem with it that I have with any of the previous neural network hedge funds or, for that matter any of the 24-hour business news stations:

* If you truly had the ability to predict the price direction of ANY stock/fund/option in ANY consistent time frame (24-hours/week/month/quarter/year) ahead of time, with ANY accuracy greater than a coin flip, it would be ridiculously easy to turn this information into piles of cash.

So, if you are NOT talking to me from atop your piles of cash, I have to assume your accuracy is no better than the flip of the quarter in my right pocket.

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It's a lot more complicated than that. Even a consistent prediction will generally only give you a small edge, and turning a small edge into real money is incredibly difficult. Just like ideas aren't worth much in startups, execution is a bottleneck on most otherwise-reasonable trading ideas.

There are a lot of problems:

- transaction costs quickly eat into your margins

- regulatory compliance requires a lot of careful work, with non-trivial penalties for mistakes

- different exchanges and countries have different rules

- trading across different timezones is difficult

- synchronizing your actions across multiple venues is incredibly hard

- you might need more leverage than you can get as an individual

- sourcing and cleaning the up-to-date data you need to actually trade on a model (vs back-testing) requires intense work and is expensive

- since your edge is probabilistic in nature, you need a particular risk tolerance (backed by enough cash to survive runs of bad luck, of course)

A lot of successful trading firms live and die more on their infrastructure and execution prowess than they do on brilliant insights and predictions. Even if your prediction or model is good, you might simply not be able to use it because you don't have access to the capital and infrastructure you'd need.

This is probably Numerai's core value proposition: they have an open system for people to submit models (ie predictions) and then use their existing infrastructure to actually execute the best ones.

Notice I used the word ANY, not EVERY. If you can do better than a coin flip in ANY prediction, you can make money over time.

I would assume the rational person with such predictive power would choose the relationship with the least complications.

I'd say it's better than 50% that you'll sleep tonight. It's also better than 50% that you'll sleep on a bed or couch. I guess all I need to do to make loads of money is invest in furniture companies?

There is no market in predicting where I sleep at night because no one is willing to take the other side of that bet.

So... there exist predictions where being able to do better than a coin flip does not mean you can make money over time. This is in direct contradiction to what you said above:

> If you can do better than a coin flip in ANY prediction, you can make money over time.

It's also not true even in the case of predictions where there is a relevant liquid market. If everyone can do better than a coin flip, then I can only make money doing better than the rest. And even if I can do better than everyone else, if it's not better enough that the earnings cover my costs I am still losing money over time.

A good description of investing is, it's like a game of chess that you can win (using skill) and get $1, and after every game you bet $50 on a random (unbiased) coin flip.

Clearly, you can make money over the long run. But it's incredibly easy to go bankrupt. In addition, there's only so many chess players (trading opportunities), so after a certain point, there's nothing to be gained by investing more money (e.g. Renaissance has been returning 20% for decades, but only have a capital of about $10B - they pay out the profits because it's impossible for the to invest more money using these strategies).

Fair view. A few points:

- Numerai does not have the ability itself, it harvests predictions from many others.

- To assume that better than random guessing is not possible, is to assume that the stock market is operating at maximum efficiency, and that all the hedge funds that are profitable have very lucky random number generators, instead of well-paid quants.

- The co-founder of perhaps the biggest money making hedge fund, Renaissance Technologies, has invested in Numerai. http://www.wsj.com/articles/renaissance-technologies-hedge-f...

It's a bit like saying you don't trust any SEO company that does not rank #1 for SEO. Fair, sure. But the reality is a bit more grey. Disclosure: Won a few bitcoin on Numerai.

I'm not saying it has to rank #1, I'm saying it has to move up any amount.

Renaissance Technologies obviously is a good name to tout but they could have invested for reasons that don't apply to other investors, such as keeping an eye on a new/competing technique in case it bears fruit.

Unless you're extremely well capitalised, you'll be ruined by variance. If you can predict stock movements with 50.1% accuracy, you have a potentially profitable trading strategy. To make meaningful profits, you need a massive reserve of cash behind you. If you're right 50.1% of the time, you're still wrong 49.9% of the time. The wins and losses won't be evenly distributed.

Poker is much the same, on a smaller scale. A professional player can turn consistent profits in the long run, but there's a huge amount of variance; they might have a mean hourly profit of $200, with a standard deviation of +/-$2000. You need a huge amount of capital to absorb that variance without going bust.

I can't argue with your point or your analogy.

The amount of capitalization needed however doesn't seem prohibitive as long as you are sure you have that slight, if inconsistent, edge.

Options are made to slice and dice exactly this kind of risk for a reasonable cost.

This is a very simplistic view of the markets and there is nothing ridiculously easy about turning information into piles of cash, its not like a light bulb goes off and your bank account instantly has $1M in it. Here are some examples where I might be able to develop an edge based on an algorithm but not be able to monetize it without help.

- The strategy may require trading access to markets or software that I do not have because I lack capital/connections/education required, like large capital requirements for heavily leveraged strategies or market-making strategies that require one of a limited number of seats.

- The strategy may require very active trading but I am not in a personal situation to be that active because of job/family/prison. Many options strategies are here.

- The strategy may be profitable on a small dollar amount but will require a trader with more experience to scale that up to a larger amount of capital. This happens a ton, dealing with scale is much more difficult that most people realize.

I'm not saying you should accept anything at face value, I'm just saying you should not dismiss them because they aren't already rich.

I'm not talking about "information", I'm talking about the ability to predict. And I'm setting a very low bar.

Predictions are information. :-) In any case, I was just responding to the maxim of "if it works why aren't you already rich?".

I have a options strategy in front of me that is definitely profitable over the last 10 years, no question. Up in every month over that time-frame except 3 times. I'm not rich because it needs nearly constant monitoring and large starting capital and I can't do that with my day job.

But, if I ever try to raise that capital, I will be very sad if all I hear is "if it works why aren't you already rich?"...

Best of luck.

The article says: "Numerai’s fund has been trading stocks for a year. Though he declines to say just how successful it has been, due to government regulations around the release of such information, he does say it’s making money. And an increasingly large number of big-name investors have pumped money into the company"

So perhaps they are sitting on piles of cash?

Investor cash, it sounds like.

The stock market itself has gone up in the last year. Exactly what regulation prevents funds from releasing information about their track record? Any fund you buy is provided to show you their track record, as well as "SEC Yield" a normalized measure of recent returns.

Sound to me like they are trying to avoid being compared to other metrics, because they don't fare as well.

Laws against making a public offering, which hedge funds are generally subject to, prevent public disclosure of track records.

I'm going to need a source on that one. That sounds like bunk.

Hedge funds do not want to run afoul of the SEC rules on marketing. Even though these rules were relaxed in 2013, the risk of revocation is there. http://www.newyorker.com/business/currency/why-arent-hedge-f...

I bet they show potential investors their returns. But to the public? That may be both iffy and unnecessary.

Showing returns isn't the same as making a public offering. This article doesn't even claim that. Hedge fund managers do it on CNBC all the time without running afoul of the law.

"Given the uncertainty and potential adverse consequences of forfeiting the Regulation D exemption, many fund managers [are] careful to avoid specifically mentioning any fund names or details in interviews and press releases." Thomas P. Lemke, Gerald T. Lins, Hedge Fund and Other Private Funds: Regulation and Compliance, General Solicitation or Advertising Activities, S. 4:8 (2016). The edit above from "were" to "are" is based on my own experience as a practicing hedge fund attorney. While, as mentioned below, the JOBS Act loosened the compliance burden with respect to public offerings, most smart hedge fund managers still play by the old rules. "Avoid specific discussions of past performance--In the context of a press release or interview, providing applicable disclaimers and disclosures would be problematic and cumbersome. If a discussion of performance is unavoidable, the performance should be given net of fees." Id., Press Releases and Interviews, s. 5:12. We would generally advise our clients that there is no situation where a discussion of past performance is avoidable, and it should be avoided absolutely.

This screams 'Ponzi scheme'. If you are thinking of putting money into this, don't walk away - run away.

Above-the-board trading institutions don't have problems with nebulous 'government regulations', when talking about how profitable their funds are.

You've no idea what you're talking about. Hedge funds (legally) can't advertise to retail investors (if they do, they're no longer hedge funds, which substantially increases their regulatory burden and narrows the range of strategies they can trade). Having said that, even if they could, they probably wouldn't want retail investors - if they're good, they can get rich investors (e.g. $10M+), reducing their administrative costs and allowing them to trade with longer horizons.

I agree. Just look up ai-expert Ray Kurzweil and his hedge fund FatKat. Boom.

I don't know if it counts as insider information, but Numerai might have access to superior data, but they obviously don't want to give it away, as they would lose their chance to make money. This way they keep the power but leverage the knowledge of those with good analytic skills. I guess it would work in a situation where one party has knowledge, and the other party has skill, and it is only possible to profit when both are combined, but the one with the knowledge wants to maintain all the power in the bargain.

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