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Comment by gtrubetskoy | Hacker News Reader

I'm skeptical. There are skyscrapers in NYC's, Londons, Singapores and Hong Kong's of this world filled with people who are smart and have enormous computer resources and funds and are paid handsomely to work on solving this problem with all manners of ML and AI at their disposal, the "crowd" has no advantage over them. The "closed system" is much larger than the "crowd" in this case.

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Unless there are people in the "crowd" who work in machine learning / data mining in totally different sector (let's say genomics/biostatistics as this is the example in the article) but have no access to the hedge fund world.

The "crowd" could very well have a long list of very intelligent people who are "experts" in some other sector and who have fresh insights and want to get some anonymous extra income on top of their salary.

This said, I think their compensation seems really low.

I don't think this is true at all. 10,000 people are just going to have more ideas and better individual ideas than 100 experts. The impact of that much creativity and perspective can be exponential, and it's hard to duplicate.

When I'm designing a system, I hate to have to try to out think everyone on the internet. If you have a known set of opponents you can predict what they might do. When you're up against anybody from anywhere, you never know what you're going to get. Global scale collaboration is a very powerful thing because it allows a complete exploration of the solution space, and it's difficult to stop.

I absolutely disagree. I'll take the word of 100 experts over 10,000 amateurs.

The two aren't exclusive. What's to stop the experts from doing this as a side project?

They stand to lose a lot for relatively little gain. Hedge fund non-competes are very, very carefully enforced. Making money trading on the side would get you sued.

Examples of the word of 10,000 amateurs:

* Anti-vaxxers

* The healing power of crystals

* Moon landing conspiracy nuts

* Multi-level marketing

There are also 'experts' in these fields, so your point is moot.

OK, but how many physicists support the moon landing conspiracy? How many aerospace engineers support the moon landing conspiracy? What credentials do the experts of the moon landing conspiracy have that I should trust?

I think he has a valid point if you have bias in which experts you place trust. There are, in fact, a lot of experts -- and even academically tenured, credentialed, published experts -- that I agree, don't have much of anything worthwhile to say.

Ya, true. There are particular areas though where 'wisdom of the crowds' works much better than any expert, and then there are obviously areas where it does not.

I'm not sure exactly what the properties of each type of problem are, but it doesn't seem at all obvious to me that stock picking is not one in which a sort of herd optimization approach might be very effective.

Examples of the word of 100 experts:

* LTCM implosion

* The Great Recession

* Libyan and Syrian wars

* Fukushima

The interesting factor here is strategy sizing. The 100 experts need to manage portfolios of a certain size. The amateurs don't. There are people who can carve out a living of a strategy that has sustainable alpha but would not be attractive to hedge funds due to the capacity of the strategy.

This is absolutely true. Many, many strategies that are viable at small portfolio sizes fall off very quickly when millions, tens of millions of dollars start to be used for them.

Although the world's financial markets are massive, the little inefficiencies that can be exploited for profit often aren't.

"This is absolutely true. Many, many strategies that are viable at small portfolio sizes fall off very quickly when millions, tens of millions of dollars start to be used for them."

I've thought this for nearly a decade now, yet have never seen or thought of such a thing. Of course I'm just an idiot so the fact that I didn't think of any means nothing; but you'd think that in all that time looking for it, someone somewhere would have described such a thing, even if only to make money on 'how to find small-portfolio investment strategies' ebooks and seminars.

So I'm curious what makes you say 'absolutely true' rather than 'I think so too'.

Dude, in the context of an internet post "this is absolutely true" MEANS "I think so too."

Sure, it was just a roundabout way of saying 'please elaborate' while trying to keep the tone non-combative.

Well to start with people running small capacity strategies tend to be just as secretive as running a large capacity strategy. Strategy capacity is something that professionals talk about and doesn't get as much play when talking to a retail audience.

As for the approach, its not any different than finding a high capacity strategy. It requires some piece of information or insight that other market participants don't have. Consider a scalping strategy that trades a few different futures contracts. If on average we trade 200 times per day with an expected profit of $5 per trade with are making $5,000 per week with our strategy. If we say we spend $5,000 per month on the tech to run our business (a risk system, market data, compute time, etc...) we are making $15,000 of profit each month.

If we are a large hedge fund or prop operation the $15,000 per month (assuming the same costs) may or may not be worth running. As a trader say I am making $250K base plus some percentage of my P&L I would definitely need to be running more than that strategy to justify my job. Depending on how much attention it requires it might not be worth the company running it. If I have two other strategies that each make $100,000 per month for the business am I better of in investing in those strategies or one that makes a lot less money? The answer could be yes (like maybe I could add a hundred more instruments to trade) but just like any other business the investment will be evaluated versus the expected returns of my other options.

I understand the last paragraph, my question is more: what makes strategies not scale. Should you go looking in very niche sectors, where the transaction volume limits the scalability? Or are there particular classes of market insights that by their nature only allow (relatively) small profits? Or are there areas where one can exploit particular technical skills? Or maybe focus on geographically small areas somehow, which by their nature limit the potential profit and thus might keep out big players?

I'm not a trader and the level of my questions probably shows that; still despite my (amateur) research for years, I haven't found evidence of people successfully deploying such strategies. And while particular strategies of big players are secret, there is a lot of information on the general principles; for small setups, nothing (afaik). So that leads me more and more to the conclusion that it's simply not viable.

Looking at it another way: a trader who got his experience in a big fund, and who goes solo (a documented scenario), do they go after such inherently small markets, or do they do the same they'd do at a big fund only with less money or with less sophistication? In other words, if they'd have more money, could they scale up or not?

So if you think about any opportunity in the market you are bounded by how much liquidity is available at a price level that is mispriced. In many cases the size (or capacity) is correlated pretty closely this what the expected duration of a trade is and the size of the mis-pricing. In my example of a futures contract that is not very liquid as you move into the market and buy contracts you will naturally move the price such that the price moves to the level you were expecting it to. This limits how much capital can be deployed in an single trade.

Bloomberg wrote about smaller shops a few months ago: http://www.bloomberg.com/news/articles/2016-03-16/barbarian-...

I run a strategy currently which consistently is profitable. I know others that do as well. What I run currently is work that came out of starting an automated trading shop so my partner and I have a considerable amount of infrastructure at our disposal that others just starting might not. I currently work elsewhere in finance but may return to it full time when what I am working on now either succeeds or fails. There have been a proliferation of 2 - 5 person shops that are typically pretty secretive about what they do. Several people I know in different ones don't even say that they have a job on linked in.

That being said there is a lot more available off the shelf things available now (Quantopian,etc...) then there was 5 years ago when I tried.

To your last point going to different markets is not just something that individuals can do. There are for instance HFT firms that started trading in places like brazil given the competitiveness of US markets. Markets are only long run efficient.

The excellent thing is we have fund size as a scoring system.

My point is that in the world of quants, it's more like there is 10,000 paid experts who are not about to share anything and 100 amateurs.

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