AI becoming just another tool in the trader toolbox

In the collective mind, the trading floor is often depicted as a chaotic and noisy place where traders shout out orders at the top of their lungs. The reality is much much quieter. Where humans used to shout, bits and bytes now move silently.

The process started when trading shifted from manual, voice-based actions to computers. Then it developed further when automated order routing was added, saving time and resources. Then, automated trading systems rose in popularity, responsible for about 75 percent of today’s market volume.

In recent years, with the advent of cheap computational power, the next step of automation is trading automation driven by AI or machine learning. It is here that popular media propagates fears about the ultimate takeover of machines.

“It feels like some of the buzz and the hype has died down, which is an interesting stage in the lifecycle,” said Tom Doris, CEO of OTAS Technologies, a market analytics and trader intelligence company. Now, he adds, we can get back to looking at the problems that technologies like these are supposed to solve.

A typical trader, explains Doris, has too many orders in his queue. Faced with this, he will start processing them from the top and work his way down to the bottom. He might linger a little bit more on those that are more volatile or require more attention, but it might be hard to spot those among the noise.

“The market is generally pretty boring,” Doris said. “If you have 100 orders, 95 of them are perfectly ordinary. It is all very predictable. Your task as a trader is to find those 5 percent where something unusual is happening.” OTAS’ technology is able to create a predictive model of how a stock should behave, and alerts the trader when unexpected information changes a stock’s behavior. The technology can be plugged directly into an Execution Management System, so that the trader can act on those alerts instantly.

The trend over the last couple of years was towards increased automation, attempting to take humans out of the loop. Now, it’s understood that there is a limit to what a trader can do systematically.

“You want humans looking at situations where there is a human story going on,” Doris explained.  For example, when a stock starts to rally because of aggressive buying, only a human with a good understanding of the risk landscape and the company’s story can discern if this is informed flow or a trend that may revert.

There have been several hedge funds priding themselves in the use of AI software to guide their decision making, including Bridgewater Associates, Renaissance Technologies, D.E. Shaw, and Two Sigma. Many more firms describe themselves as “systematic”, meaning they base their decision making on computer models, which might not be driven by AI.

Perhaps the most common approach to AI in investing is the use of natural language processing to be able to make sense of unstructured market data and the use of neural networks to identify patterns, relationships and hidden trends.

AI is seen now more as another tool in the toolbox of traders, rather than a magic bullet, Doris concluded.

Moving beyond the golf course: A resource guide to hedge fund LP marketing

Moving beyond the golf course: A resource guide to hedge fund LP marketing

Traditionally, the process of marketing a hedge fund to potential LPs was a slow process of relationship building, epitomized by the golf course cliche.

Hedge fund managers would mostly raise capital through third party marketers, who acted as middlemen connecting prospect LPs, institutional investors, financial advisors or high net worth individuals, to hedge fund managers.

After 2012’s JOBS Act was passed, hedge fund managers can utilize the same digital marketing strategies other industries use to increase brand awareness and customer loyalty. Marketers like to talk about convergence of earned, owned, and paid media as the most holistic marketing strategy and hedge funds are now permitted to publicly solicit.

The 3 types of media

Earned media is the exposure and awareness a brand receives from the media or the public. This includes speaking engagements, mentions in the press, and social amplification. Owned media is exposure and awareness generated by the firm itself. This includes blog posts, white papers, research, and newsletter campaigns. Paid media is exposure that was paid for, such as newspaper ads, sponsored content in trade magazines or paid search and social campaigns.

The three types of media are considered convergent as activity can flow from one type to another. A white paper can be picked up by reporters, turning it from owned media to earned. Seeing the effectiveness of that piece of content, a firm can decide to pay to promote it in search or social channels to its target audience.

Hedge funds slow to move

But even though public solicitation is now permitted, few are actually doing it. Hedge funds are missing a big marketing opportunity, claims April Rudin, Founder of the Rudin Group a marketing strategy firm servicing financial services and wealth management. Thinking of high net worth individuals as less digitally savvy is a misconception.

“Investors are very receptive to digital,” Rudin said. “High net worth individuals are receiving more and more information, and want to receive more information, on digital channels. What they are no longer receptive to is getting the 50-page PDF, or 25-page pitch book from a hedge fund and trying to figure out what it means. There is huge appetite for easy, digestible information that is more authentic and genuine than what has been put out in the past.”

Best practice marketing approaches do not change the basic nature of LP marketing, relationship building and management — they just inject them with steroids. It is important to remember, however, that a marketing strategy is a marathon, not a sprint. It requires an organization to be regular and persistent in its thought leadership activities, as well as knowing how to personalize a message to various target audiences.

Advanced tools for prospecting, relationship management and communication automation help hedge fund managers scale their efforts to reach new potential investors, stay top-of-mind with their current investors and strengthen their brand awareness.

Here is a list of tools that can assist hedge fund managers in their marketing efforts.

Identifying the right audience

  1. Pitchbook: Pitchbook is a robust database of investor and deal activity. The database’s advanced custom search allows one to pinpoint potential LPs for prospecting, or keep up to date with current prospects in the pipeline. For an additional cost, the company also offers an API, which can sync a firm’s internal databases with the latest updates on a particular contact or company.
  2. Relationship Science: RelSci Is a targeted networking tool for investors, philanthropists, and high net worth individuals. The platform has an impressive amount of data on each profile in its database and allows users to search for the shortest path to get introduced to a target. This feature is extremely useful when researching decision makers in a given organization. The company boasts approximately four million business leaders and a million organizations in its database. Each profile includes work history, board connections, deal history, education, non-profit affiliations, investment holdings, personal interests, business relationships and personal connections.
  3. Trusted Insight: Trusted Insight is an alternative asset syndication platform. Though the platform’s main objective is to vet and discover new investment opportunities, the platform also enables its members to connect, network and even get hired. The company claims that among its most reputable family offices, financial institutions, and 140,000 members are some of the world’s largest pension funds and endowments.
  4. Wealth-X: Wealth-X is a database of ultra high net worth individuals. Each dossier includes an individual’s financial profile, interests, known associates, affiliations, family members, biographies and news. Like LinkedIn, if a user identifies his own contacts, he can easily see their contacts and ask for warm intros.
  5. Hedge Connection: Hedge Connection’s Capital Club, an online investor introductory service for fund managers, allows hedge fund managers to search for investors, and also to schedule calls directly from the platform. All investors have opted in to the service, so there is no concern of spamming.
  6. Harvest Exchange: Harvest Exchange is a content platform for hedge fund managers and other institutional investors to post thought-leadership content and share ideas and perspectives. This, in turn, can foster new business relationships and exposure to prospective investors on Harvest. The company claims 10,000 financial firms and 300,000 individual investors are on the platform.

Maintaining the relationship

Connecting with a prospect is the easy part. The grunt work of sales and marketing is the art of the follow up. A good CRM — an oxymoron if ever there was one — is essential for this. Some of the must haves for a good CRM are reminders to follow up and good email integration, so a prospect can easily be moved down the funnel, making sure no details are lost along the way.

Some popular CRM choices for hedge fund marketers include:

  • The grandaddy of CRMs in the cloud, Salesforce and its data tool, SalesforceIQ, which automatically enriches a contact’s record with information gathered from public social profiles.
  • Base CRM, and Hubspot CRM, the latter has the ability to send emails automatically based on predefined rules. For example, a hedge fund marketer could send a follow up email with a pitch deck if a prospect did not reply to a previous email after 3 days.
  • Some CRMs like Backstop’s and Ledgex’s were designed specifically for hedge funds

Optimally, a firm’s contact list — properly tagged and organized —  should be synced with email marketing software. Mailchimp, Constant Contact and Campaign Monitor will all help bulk email contacts and they’re all pretty similar in what they offer.

Creating segmented lists for email marketing is essential because different people in your database require different types of communication. Segmentation allows for tailored communications while maintaining the ease and scale of email marketing. Emailing qualified leads is different than sending updates to prospects you met with already, trying to move them down the funnel. Your current investors will demand other types of content altogether.

Tying it all together

Regardless of what tools a hedge fund marketer employs, it’s important to go in with a good strategy. “The most important thing is to create a marketing plan,” said Rudin. “Every hedge fund manager has an investment strategy that has a plan, but not everybody has a marketing plan.”

Without a structured method and message architecture, Rudin warns, financial firms end up engaging sporadically in marketing activities. Without consistency, this type of messaging doesn’t compound to strengthen a particular pitch about a fund and can end up being generally a waste of time.

Though this may sound daunting, there is a method to the hedge fund marketing madness. Using advanced prospecting methods will send more leads down the marketing funnel. Consistent, periodic and personalized communication with prospects in different stages of the pipeline will make conversion easier when it is time to raise new funds.


Photo credit: emjstout via VisualHunt / CC BY

5 trends we’re watching this week

5 trends in finance this week

[alert type=yellow ]Every week at Tradestreaming, we’re tracking and analyzing the top trends impacting the finance industry. The following is a list of important things going on we think are worth paying attention to. For more in depth trendfollowing, subscribe to Tradestreaming’s newsletters .[/alert]

  1. BDCs: An untapped tool for local investing? (Locavesting): In fact, business development corporations (BDCs) may be the only solution for a growing problem that is starting to hit communities across the country—the increasing number of baby boomer small business owners who are ready to retire. They’re flooding the market with businesses for sale, resulting in many just being shut down for lack of a buyer. But through a BDC, the community can essentially become the buyer and keep those businesses up and running, retaining the jobs they generate.
  2. The Economist plans to double circulation profits in 5 years (Digiday)
    The British magazine has an ambitious goal: to double circulation profits in the next five years. Here’s how the magazine plans to do it…
  3. Victory Park Capital taps Goldman exec for CIO role (FINalternatives)
    Behind many of the $100m+ investment rounds sits Victory Park Capital (VPC), a provider of lending facilities for many of today’s top online lending startups. Former Goldman Sachs managing director Upacala Mapatuna has joined Victory Park as chief investment officer.
  4. Citibank: Google should buy AIG and turn it into a fintech lab (BusinessInsider): So why exactly does Citi think Google should pair up with one of the largest insurers? Could be really interesting, actually.
  5. How Murano helps hedge funds identify better, close more investors (Tradestreaming)
    The world of third party marketing has enabled the hedge fund industry to massively ramp its AUM over the past 15 years. With >10k funds and 30k allocators, it’s time that someone emerge to be a better matchmaker. Check out what one company is doing to improve the outcomes in institutional fundraising.

How Murano helps hedge funds identify better, close more investors

murano hedge fund marketing

Capital has always been a blessing and a curse for the hedge fund industry. Without it, you can’t begin deploying it and with too much of it, returns revert to the mean. Entrepreneurial portfolio managers seek money to back their new funds and try all kinds of fundraising activities to capitalize their investment strategies. From hitting up old employers, tapping friends and families, or embarking on roadshows, raising a fund can be a massive marketing campaign. One manager recently turned to the Internet, wrote up an investment thesis on a website and landed $20 million for his Houston-based commodity fund.

A cottage industry of hedge fund marketers grew up to assist portfolio managers in fundraising. This worked really well 15 years ago when there were just a couple of hundreds of hedge funds. Marketers knew their investors well enough to pair them together with a new manager. Investors valued third-party marketers (3PMs) because they need help to find promising small funds (in a study conducted by Pertrac, smaller funds outperformed larger ones 13 out of 16 years).

The business model of hedge fund 3PMs makes it easy for a new fund to begin raising money. Typically, no money changes hands and the economics of the fund raising are split between the fund manager and the marketer (marketers can receive 20% of management and incentive fees). But, by 2015, there were over 10,000 hedge funds globally, a record for the industry. With few barriers to entry, a lot of people entered the 3PM space, hawking all kinds funds and managers, and making it harder to matchmake. Roadshows that

In some way, this dynamic — managers hiring agents to rep their fundraising — has strengthened the need to have a top quality marketing firm in order to cut through all the noise. The revenue model of splitting fees on AUM also makes it hard for a manager to assess whether he’s getting the best out of his marketing firm. “It’s really hard on a marketer — to work months without getting paid,” explained Ole Rollag, who runs Murano Systems, a research company that connects investors with managers. “This has made 3PM a transitory job for many. They end up leaving the industry and that’s really hurt the idea of 3PM.”

Murano has a different approach. While Murano still gets paid by the funds it represents, in a way, Rollag’s firm has aligned itself more on the side of the investor. Murano employs more than 20 full time researchers in London and NYC to work with investors to better profile their strategies, goals, and needs in deploying their capital. “We’re much more similar to a dating service,” Rollag said. “We’re listening to allocators and taking cold-calls away from these investors.”

To help its clients be more efficient with its fundraising, Murano has pioneered a new type of CRM. Built on top Sugar CRM, a popular open source contact manager, the firm built tools that enable its in-house researchers to push out profiles of appropriate investors to individual clients. According to Rollag, this one-way sync hadn’t been done before and he’s working to apply for a patent on the technology. Murano is also currently in the process of developing a proprietary index that measures institutional intentions, based on the real-time insights their analysts collect on a daily basis. Rollag estimates there are about 30,000 total allocators out there and on behalf of its 70-something clients, Murano’s team of researchers has spoken to 15,000 of them.

Like many firms in finance, Rollag’s firm is a hybrid — using “old world” technologies (telephones and email) to aggregate and extrapolate “big data” insights that cannot be obtained through any other means. Murano is currently working with some quants from Oxford to ensure that the underlying analytics and accuracy of the Index are based on rigorous methodologies. Murano believes that, because this Index is based on real-time investment intentions, that “it will be unlike any other benchmark, and a valid barometer of market momentum and asset class preferences”.

Other firms are addressing the matching of supply and demand of institutional capital with appropriate investment strategies. Harvest (read/listen to our interview with Harvest’s CEO) helps fund managers connect directly with investors using investment content as the communication medium. The company claims to have 8000 of the world’s top investment firms on its platform.

Prequin is widely used in the 3PM business and bills itself as the most comprehensive database in the alternative assets industry servicing private equity, hedge funds, and real estate.

“This is an industry, for the most part, that doesn’t use electronic solutions,” Murano’s Rollag concluded. “In some way, though, the old fashioned way is still the most efficient. It just needs to be enabled with technology.”

[podcast] How today’s fund managers connect with interested investors — with Peter Hans

finding a job in finance

Imagine a world where regulation and compliance didn’t rule financial services with an iron fist. Ok, that’s never going to happen but certainly it’s fair to hope for an environment that makes it easier to market investments to high net worth investors. And to some extent, the system is trying to ease up a bit on the regulatory and compliance issues that have rankled the investment industry for decades.

Peter Hans, Harvest Exchange
Peter Hans, Harvest Exchange

New startup fintech companies may be focused on offering broader reach at a lower price point. But according to our next guest, this is somewhat misplaced. Fees in the industry have typically been high precisely because the cost of doing business is high. Peter Hans is the co-founder and CEO of Harvest Exchange — Peter explains that it’s expensive and long cycle to identify and acquire customers — especially as trends on the investment side encourage deeper diligence and more access to more information.

Harvest enables the conversations institutional investors want to have with their clients and makes them happen by connecting these investors to public and private communities. We’re not talking about Facebook for finance — we’re talking about 7000 top investors and investment firms (funds like 3rd Point and Highland Capital Partners) who are seeking tools to more efficiently communicate with existing and prospective clients and investors.

Peter and I talk about:

  • why the asset management industry has been slow to adopt change and new technologies
  • how some of the leading firms are beginning to use best practices, tools and techniques pioneered in other industries to better communicate, market, and ultimately, attract more investors and assets to their funds and products

Listen to the FULL episode



Artivest’s James Waldinger on bringing private equity and hedge funds into the digital era

james waldinger, artivest

James Waldinger is the founder and CEO of Artivest.

What is Artivest? What was the genesis story (where did you come up with the idea)?

[dropcap size=big]O[/dropcap]ur mission at Artivest is to enable wealth managers, including financial advisors and family offices, and their qualified clients to efficiently access leading private equity and hedge funds. We are an end-to-end alternatives investment platform, starting with low-minimum access to a vetted set of managers and easy-to-understand online fund information, and ending with seamless monitoring capabilities and integrated reporting.

CEO of Artivest, James Waldinger
CEO of Artivest, James Waldinger

I came up with the idea when I was working at Clarium Capital, Peter Thiel’s hedge fund. I saw how institutional investors had access to premier private funds that individual investors didn’t, and also noticed how cumbersome and inefficient processing investments was, in terms of filling out subscription documents, managing distributions and reporting, etc.

Artivest solves both the access and the operational problem. We rely on expertise across technical, financial, legal, and operational areas to provide solutions that create an exceptional experience for advisors and clients, including:

  • Access to in-demand private equity and hedge fund managers at lower minimums
  • A single log-in for fund diligence, investment processing, capital calls, distributions, and ongoing individualized reporting including tax documentation
  • Hassle-free online subscription document completion
  • Integration with fund managers’ performance report providers
  • White-glove service from our seasoned Investor Relations team

Our team has spent years building, testing, and refining our platform to remove the friction of and digitize the otherwise complicated, manual experience of private fund investing.

Why build Artivest now? What forces are conspiring to make this a smart offering in today’s market?

Fundamental shifts in the industry are creating new challenges for both fund managers and financial advisors. The Artivest platform addresses the imperative for both groups through a single innovative solution that facilitates engagement:

  • Alternative fund managers are increasingly looking for solutions or products to reach the advisory community—increasingly, the fast-growing independent advisory community—as they recognize that the HNW channel is key to future growth. Private bank platforms have already demonstrated the opportunity. The independent wealth management channel is the next frontier, and fund managers who understand this shift are prioritizing it.
  • For advisors, increased alternatives education and investment sophistication have sparked demand from investors for uncorrelated returns, varying liquidity profiles, and other portfolio solutions for today’s markets. These investors are looking for institutional quality investment choices.

In the past two decades, our society has upgraded our technology from desktops and pagers to tablets and smartphones. We do our banking online, we do our jobs online, we buy cars and homes online…yet, when it comes investing in alternative investment funds, the sector does things the same way they were done 20 years ago.

In a way, it makes sense that not many resources have been spent thus far changing the system. After all, investments in alternatives have largely been driven by institutions–a high-dollar, low-transaction volume business. However, these institutional-focused processes that private equity and hedge funds utilize to process investments, including customized pitch books and phone calls, travel, and cumbersome error-prone legal documents cannot scale to meet the needs of the large number of smaller sized investors that now seek these products.

As the demand for alternatives has expanded to the individual high net worth (HNW) market, the processes and infrastructure currently in place for most fund managers fall short.

Another example of where this plays out is with asset managers and private banks. We’ve found this group to be very interested in using Artivest’s platform to streamline their own fund operations.

You have a very strong group of investors, including KKR, who led your most recent round. What’s their play?

We are grateful and humbled by the support of our financial backers and partners. We believe our success thus far in attracting these premier partners is predicated on the scale of the opportunity we’re addressing, and, of course, the strength of our team.

Recognizing the evolving landscape of alternative fund managers looking to deepen their reach into the HNW channel, and the increased interest among advisors in accessing quality alternatives, our team relied on decades of collective experience in technical, financial, legal, and operational areas to create an innovative and integrated software solution.

The Artivest business team hails from well-established alternative investment managers, top tier banks, and advisory firms; while our technology team brings a Silicon Valley emphasis on design and usability not traditionally found in financial firms. Our executive team has decades of leadership experience across technology and finance. We believe that this level of talent and sophistication is uncommon for a young, venture-backed company like ours.

Who’s your target investor? What were their options before Artivest launched?

Many HNW individuals and advisors have traditionally avoided alternative offerings given the logistical obstacles in making an investment, particularly the cumbersome compliance, paperwork, and the challenges of finding investment opportunities at appropriate minimums.

As HNW investors have entered the alternatives space, the breadth of needs have expanded and products have begun to fill these new requirements. The fund of funds model addresses the HNW investor’s desire to pool money so they can meet the high minimums required to achieve diversification across private funds. However, we’ve seen downward pressure on the extra fees that accompany product structures like these in recent years. By tapping into technological efficiencies, Artivest aims to offer access to these types of products while keeping both minimums and fees competitive.

We are also very careful about the financial products we offer. One challenge in the space is the tendency to innovate too quickly on “trend” products before an economic cycle or two have proven out their results. Suitability is also an important consideration. It’s obvious that private equity funds are not for everyone. They are highly illiquid. In addition, not all private equity funds are the same.

As we bring these products to the HNW market we’ve been very focused on providing a carefully vetted selection of funds. We’ve worked with regulators to build comprehensive know your customer (KYC) and compliance infrastructure to ensure that these products are only made available to suitable investors. We see liquid alternative versions of PE and other variations; there’s certainly room there to innovate, but we strive to build products that bring real benefits to our partners and investors and that takes time to do it right.

What kind of tools do you provide investors with to help them choose funds?

Artivest presents each fund in a straight-forward, consistent, and transparent manner.  The strategy, team, market, performance , terms, and fees are all clearly displayed so advisors and their clients can quickly and easily access relevant information. In addition, we provide full versions of the PPM and tear sheets in a secure data room. Advisors are able to securely share this information with their clients through our platform.

Additionally, we are focused on advisor and investor education; our investment research team is available to explain investment diligence in detail. We also create white papers, primers, and other content to help educate those who may be new to the asset class or a particular strategy.

What’s next in the product/service? Where are you headed with the business?

As funds look to access the rapidly growing HNW market, we will see innovations around the different needs of these individual investors versus their existing institutional clients. Two of the most important distinctions between these groups are tax treatment and time horizon. For example, an institution may have a 200+ year investment time horizon while that of individuals and families is typically shorter.

We’ve already seen this demand for increased liquidity result in the development of liquid alternatives. This is just one example. Other products, such as those optimized for individual tax treatment, will continue to surface as HNW demand continues to grow.

Another trend is the increased sophistication of the HNW space and the resulting development of niche needs. For example, we’ve seen an increased demand for co-investments as individuals either understand individual investments better or have portfolio needs specific to their own risk profile or financial situation. As we remove the inefficiencies associated with one-off deals we will see granular choices become more and more economically feasible.

Artivest aims to be the destination for alternative investing. We have custom-designed our investment platform to serve the unique needs of clients, including investors, advisors, private banks, and asset managers. For example, the Artivest platform helps larger advisory platforms work more efficiently with their advisor network, and aids fund operations activities for private banks and asset managers. Through our consultative relationship with these clients, we have  built tools to streamline their marketing, reporting, and workflows.

Finding a job in finance in today’s market

finding a job in finance

I’m not going to pussyfoot around it: it’s tough to find a finance job in this market.

Whether you’re on Wall Street, working the buy side, or a recent (or soon-to-be) grad looking to break in — we’re in a contractionary cycle for finance jobs.

That means any existing jobs are more competitive and take longer to land.

Many Wall Street jobs have disappeared (as have the firms that employed thousands of people). Hedge funds have had a tough couple of years, some shuttered.

Tough going but you CAN find a job on Wall Street

The job landscape may be changing for Wall Street and the jobs may not be where you’d expect them to be. But there’s still PLENTY OF OPPORTUNITY for aggressive and driven people who want to make a go at it and work in one of the most rewarding industries known to man.

I’m going to help you do it.

4 Days to a Better Job: The 2012 Financial Career Bootcamp

That’s why I’m hosting the 4 Days to a Better Job: The 2012 Financial Career Bootcamp.

I’ve assembled some of the top experts with real-life experience helping professionals (young and more experienced) find their careers on Wall Street, in NYC, in Stamford, wherever people are employed in finance.

No BS — these are people who walk the talk. They’ve literally helped thousands of people build successful Wall Street careers over the past 2 decades.

We’ll focus on practical, actionable advice that will bring you one massive step closer to getting what you want.

I hope you decide to join me and students/graduates from schools like Harvard and UCLA Business Schools February 13-16 for an entirely online event, 8 sessions focused on practical advice to help you further your finance career — or get it jumpstarted.

You can read more about the event here.

Feel free to get in touch if you have any questions about the event.

Speculating on future news using social media (webcast)

There’s a flurry of activity in development of technologies, tools and platforms to help investors predict future events using social media.  Recorded Future hosted a webcast yesterday demonstrating its platform. This fertile ground will continue to be the subject of more research and investment (heck, I wrote an entire book on it).

I interviewed Recorded Future on my podcast, Recording the Future Using Social Media.  While the user interface isn’t yet going to win very many individual investors over, the company is making a lot of headway in working with institutional investors on more customized solutions.

Mistake-driven learning and the investment process

If done correctly, investing is an iterative process. One that is experienced. Obviously, if one puts everything he owns into a high-flying cloud technology stock and blows himself out, that process is stunted. Part of being an investor is playing defensively enough to continue building on past wins.

I recently had the chance to sit down with Stephen Weiss, author of Billion Dollar Mistake: Learning the Art of Investing Through the Missteps of Legendary Investors and a very experienced executive on Wall Street.  Here’s what he shared about learning from mistakes:

What do you learn more from looking at mistakes than maybe looking at successful trades?

Weiss: Well, what I found through my career and observing others is that the best investors I ever got to know, the one’s I covered through my career, and I think I have covered a hall of fame of investment professionals, was that they spent more time dissecting their mistakes so they wouldn’t repeat them, than dissecting the victories, the winning investments. They seem to resonate more, and they are much more aggravating. When you make money on stock, or on an investment theme, you pat yourself on the back and say, “OK, let’s move on.”

You do have your discipline, and you follow that discipline, but when you make a mistake it really resonates because it has cost you money. And whether it’s blow to your ego, or a blow to your wallet, generally it’s both, you want to make sure you don’t do it again. It’s, “How can I be so stupid? How did I do that?” If you can keep that mental list, or in some cases, like I do a written checklist, and say, “You know what? I’m not going to do that again, I found it’s made me money by not costing me money.”

I think that’s so interesting, so insightful. As I was reading through the book, and I was thinking about the approach, a lot of times, successful trades, it’s unclear whether they are based on skill or on luck, you know? But at least with a losing trade, you now have an opportunity to say, “Hey, what went wrong? How could I have been more skillful in that trade?”

Weiss: Yeah. Absolutely right, and mistakes, if you can take the mistakes out of your process, you do well. It’s no different than we just saw in the Super Bowl. So, guess what? The team that won made fewer mistakes. Steelers turned it over, interceptions, fumbles. Green Bay was mistake free, essentially, so they came out on top. I don’t think it’s any different in investing.

Read the whole transcript/listen to the interview.

Humans and Machines Both Reign Supreme: Takeaways from the Battle of the Quants

As markets gyrate, investors continuously hear two diverging voices in their heads.

Matt Dillon (voice of Confidence): Yo, Johnny.  My strategy rocks and I’m in it for the long hall.  I’ve looked over my allocations and they make sense.  I mean, I know what I’m doing here and everything is under control.

Woody Allen (voice of Self-Doubt):  When I began implementing my strategy, I was sure.  Oh, was I sure.  But now?  I dunno.  Am I headed in the right direction? Is volatility too much for me?

Well, the investing kings of the universe also suffer from these opposing forces.  Put differently, quants need to balance the confidence needed to put millions of dollars behind an algorithm they’ve designed and think works versus the fear that if things hit the fan, they’re just a congressional meeting away from notoriety.

Luis Lovas had a great article recounting a meeting that occurred last week, The Battle of the Quants.

The afternoon’s main battle was a panel that pitted a quant team dedicated to automated algorithms against a team that (presumably) considers human discretionary decision making as a better tool for alpha. In other words, like the Jeopardy challenge of IBM’s Watson, it was human vs. machine. That particular event I was completely fascinated by.  An interesting pre-game commentary relates the Jeopardy match to the Singularity by author Ray Kurzwell, a convergence of human and machines.  In the battle pitting algo’s against humans the outcome was decided by an audience vote.  The voting was not simply two choices: “for the machines” or “for humans”, but a third choice was offered more aligned with Ray Kurzwell’s Singularity – “a combination of human and machine decision making”.  As you might have guessed, that third choice was the overwhelming favorite. I believe the majority have the confidence to let machines decide many things but are wanting of human intuition or that proverbial finger on the button as a measure of risk control so fear does not overwhelm.

Kinda like me flying in an airplane.  I know the technology has been good enough for decades to replace a human pilot.  But I’m happy that someone is sitting there.  Just in case.

And hopefully it’s Sully.

And hopefully the pilot is sober.


Confidence and Fear: Why Quantitative Models Win (High Frequency Traders)