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probability of a loss secret sauce tricks of Renaissance Technologies HFT masters

 

Sweet Mama. This is the closest I have gotten to this secret sauce eof Ren Tech black swan risk and probability of a loss tricks

From someone who knew all the founders of Ren Tech:

I have known Jim Simons, Bob Mercer and Peter Brown since 1965, 1974, and 1979, respectively.  Renaissance has also hired senior researchers who had formerly worked for me for years.  None of these people has ever told me anything about Renaissance’s investment strategies.  My observations below have been obtained entirely from publicly available records.

In particular, the core strategy is publicly known.  It’s the details that are proprietary.  There are millions of details, and they are essential to the performance.  However, the question was about strategy, so that is what I will try to answer.

The core strategy is portfolio-level statistical arbitrage carried to the limit and executed extremely well.  Basically, portfolios of long and short positions are created that hedge out market risk, sector risk and any other kind of risk that Renaissance can statistically predict.  The extreme degree of hedging reduces that net rate of return but the volatility of the portfolio is reduced by an even greater factor.  The standard deviation of the value of the portfolio at a future date is much lower than its expected value.  Therefore, with a large number of trades the law of large numbers assures that the probability of a loss is very small.  In such a situation, leverage multiplies both the expected return and the volatility by the same multiple, so even with a high leverage the probability of a loss remains very small.

The general properties of the strategy can be deduced from the statement of Renaissance for the Hearing of the Senate Permanent Subcommittee on Investigations, dated July 22, 2014.  [https://www.google.com/url?sa=t&…

Renaissance collects “all publicly available data [they] can that [they] believe might bear on the movement of prices of tradable instruments–news stories, analysts’ reports, energy reports, crop reports, weather reports, regulatory findings, accounting data, and, of course, quotes and trades from markets around the world.”

Their models “use this data to make predictions about future price changes.”

The hearing was specifically about the Medallion fund, about which the statement says “The model developed by Renaissance for Medallion makes predictions that are profitable only slightly more often than not.”

With these properties, there were two reasons that Renaissance would like to have a call option on the portfolio that it has designed: leverage and protection against Black Swan events.

Leverage is needed because, unleveraged, the rate of return of the portfolio is low.  However, because the volatility is much less than the expected return there is no limit to how high the leverage could be without increasing the probability of a loss, at least according to the models.  Through years of use and refinement, Renaissance knows that its models are very reliable.  However, they also know that there is always the risk of something happening that is not covered by the models, in particular something that is outside prior experience, which is called a “Black Swan” event.

Thus, a call option is ideal: it can provide high leverage and can provide protection both against the very low probability of a loss greater than the option premium and also against the unknown probability of a possibly catastrophic loss due to a Black Swan event.

We know all this because these are the business reasons for Renaissance accepting Deutsche Bank’s proposal of barrier options.  Basically, Deutsche Bank, and later Barclays,  sold the equivalent of a call option to Renaissance on the reference portfolio that Renaissance designed.

Of course, writing an uncovered call on the Renaissance portfolio would be equivalent to betting against Renaissance at high leverage, which would seem to be a foolish thing to do.  The banks covered these options by buying all of the securities in the portfolio.  Thus the bank’s position was equivalent to a covered call.  In other words, the banks’ profits and risks were essentially equivalent to writing a put option, which is a bullish position.  Because the volatility was very low the probability of a loss for the bank was low and the probability of a loss greater than the option premium was even lower.

Except for the Black Swan risk.  The probability of a Black Swan risk is unknown.  Part of the premium paid by Renaissance and earned by the banks was equivalent to insurance against Black Swan risk.  I don’t know if the amounts of the premiums were publicly disclosed.

There were many more details in the statements and the testimony at the hearings.  However, discussion of further details would detract from the important points that I have made above.  In particular, the hearings themselves were about tax issues not about investment strategies.  Renaissance explicitly asserted, under oath, that its “models do not factor in tax rates when making trading decisions.”  Therefore, tax issues, although they might be very important, are not part of the “investment strategy” at least as reflected in the models, so they are outside the scope of this particular discussion.

[Edit (added in answer to a comment):  The reference portfolio was highly dynamic.  There were thousands of  trades per day.  To accomplish this, the banks gave RenTech’s computers  direct access to execute trades through the banks’ trading desks.

This  arrangement was part of what created controversy about what should  be the proper tax treatment for this particular case. However, I am not a  tax lawyer and will not try to analyze those issues.  However, if you  want to hear more details on the automatic execution of the trades, and  questions about how much human interaction was present, that is all  discussed in the live testimony before the subcommittee: [Hearings| Homeland Security & Governmental Affairs]

I have copied this in case the Quora link disappears which is from

https://www.quora.com/What-are-the-investment-strategies-of-James-Simons-Renaissance-Technologies-I-understand-he-employs-complex-mathematical-models-along-with-statistical-analyses-to-predict-non-equilibrium-changes

Notes from Senate hearings include:

https://www.hsgac.senate.gov/subcommittees/investigations/hearings/abuse-of-structured-financial-products_misusing-basket-options-to-avoid-taxes-and-leverage-limits

https://www.hsgac.senate.gov/imo/media/doc/STMT%20-%20Renaissance%20(July%2022%202014)2.pdf

Copy attached just in case that disappears

STMT – Renaissance (July 22 2014)2

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Tips and tricks with Dukascopy JForex for forex trading TONIGHT

Tips and tricks with Dukascopy JForex for forex trading TONIGHT

This is for anyone who is a hardcore fans of mine or any users of my service. I am rebuilding my site which will also contain quotes from people of my users. Let me know if you would be interested in supplying a testimonial of this group or my ELITE service for Quantlabs.net. I don’t mind linking back to a service you may as well if it is benefit to my thousand who will be visiting this page.

Just respond to this email if interested in providing a testimonial

I have an event scheduled TONIGHT at 8pm EDT for Dukascopy

Tips and tricks with Dukascopy JForex for forex trading

Tips and tricks with Dukascopy JForex for forex trading

I am digging this broker with their API features. I thought it would be cool to share some coding tips uing this impressive trading platform JForex.

Note #1: I am new with this broker and platform so please be gentle

Note #2: Dukascopy does not support American clients it seems. Sorry.

I just started creating a Youtube channel playlist for Dukascopy

Go here for the details

Also, I will be spinning off all my courses for my Quant Elite members in the next few days. I promised to hold off for a month when I first announced it so we’re now at the point. If you want to reap the benefits of these courses, join my Quant Elite membership right now!

The three individual courses will be priced at $497 each after this process takes place.

I’m also putting the membership into its last days of existence before I start rolling all current members into the new Quant Analytics service.

Some info on this new quant analytic service:

I have some video tutorials on this service here

I have also answer some queries about it here

Thanks Bryan
P.S. I am in the last few days where I will breaking out all my courses from my Elite membership: http://quantlabs.net/mkt/quant-elite/

Learn some of the courses here: http://quantlabs.net/academy/courses-2/

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C++ Linux programming tricks

C++ Linux programming tricks

Really useful programming trips for Linux and C++
These are all from Sholom so thanks to him

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Linear vs Binary Search

http://eli.thegreenplace.net/2015/memory-layout-of-multi-dimensional-arrays/

https://www.gitbook.com/book/0xax/linux-insides/details

https://sniperinmahwah.wordpress.com/

http://lcamtuf.coredump.cx/afl/

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Chicken Little Trading alerts: US Dollar Collapse and Asian Secret Society Tricks

Chicken Little Trading alerts: US Dollar Collapse and Asian Secret Society Tricks
I love these beloved stories. They are non stop but there are so many suckers who believe this stuff. I will say the Asian Secret Society one is very entertaining and creative!

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C++ compiler has GNU tricks to parallelize

C++ compiler has GNU tricks to parallelize

I am hoping you see the stupid humors in this posting

http://www.infoworld.com/article/3062473/application-development/gnu-compilers-learn-new-c-parallelism-tricks.html

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Get your FREE Hadoop Book Bundle — A Free 182 Page Sampler – A collection of big data tips, tricks, and information

Get your FREE Hadoop Book Bundle — A Free 182 Page Sampler – A collection of big data tips, tricks, and information

From Sholom who sent this so thanks to him

Packt’s Hadoop Book Bundle — A Free 182 Page Sampler” – A collection of Hadoop tips, tricks, and information from Packt Publishing.

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This Packt e-book bundle includes materials from 5 informative guides on Hadoop. You’ll enjoy a sample chapter from each title included below:

  • Hadoop MapReduce Cookbook
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Quant ‘Secret Sauce’ tricks of Matlab, bridge to C++/C#, .NET open source HFT trading platform, backtesting MYSQL historical database

Quant ‘Secret Sauce’ tricks of Matlab, bridge to C++/C#, .NET open source HFT trading platform, backtesting MYSQL historical database

I am doing this Meetup and will be demoing the following only ONCE EVER in public! I have been researching for the last few years with some ‘secretive’ techniques and tools to help in me in quant.  I will reveal as I move forward on this model/strategy development cycle and quant development stack. I will reveal the following:

  1. Matlab’s powerful toolbox that enables you to generate C++ source code from your M file script models that you develop for quant analysis and trading decisions.
  2. How to bridge your C++ generated code using a Dynamically Linked Library which can be plugged into your .NET trading application. This can also be used in a Linux/Unix based platform as well. This technique is not openly documented anywhere I have seen.
  3. The superior TRUE open source trading platform I believe is the best in the world for leading quant based trading firms and prop shops. I do know many secret hedge funds and prop shops are using this very effectively. The best part is it is free and I can also say the support is quite decent. It can also scale very well and is blazingly fast.
  4. A brief demo of how to retrieve free Yahoo Finance end of day market data to capture for your Matlab data sets. I know Yahoo as a source is not the best but who really can afford Bloomberg or Reuters? There are better options as well which we can discuss including down to the minute real time tick data.
  5. How to use Matlab to record market data and automatically insert into a MYSQL database for historical back testing. Other major commercial databases can be easily implemented as well.

 

A small donation of $3-5 is asked to cover the cost of the room. We can also take the discussion into a more social setting across in the street in a restaurant/bar after we close. I do think GOOD beer encourages wishful thinking of owning fleets of Lamborghinis and have a jet setting lifestyle!!

Details at:

http://www.meetup.com/quant-finance/events/42092262/

 

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