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Comment by cesaref | Hacker News Reader

If you want a counter example, go and investigate algo trading hedge funds - you'll find they do a pretty solid job of predicting the future. Sure, some of them predict only a few ms into the future, some a few minutes (the one I worked for was in that category) and others will do interday strategies.

I'm pretty sure there are examples which have a track record of decent returns above the markets they trade in with longer term strategies.

So, i'd say there are examples of forecasting working, but generally the people who are good at it don't write about it, and instead use their knowledge and ideas to quietly make money from their insights :)

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I don’t have a background in this but I was under the impression that much of algorithmic trading is that there are trillions of pennies lying around and if you have an algorithm that picks up those pennies faster than anyone else, you make a lot of money. So it’s capitalizing on tiny market inefficiencies rather than directional predictions.

There's a wide variety of strategies available. The type you mention of picking up small inefficiencies certainly exists but there are plenty of other strategies that involve having some sort of informational edge. Some hedge fund managers just read a lot of earnings releases, but there are also more sophisticated approaches: a famous example would be the fund that paid for satellite imagery of the parking lots of certain shops, so that they could count how many cars there were and extrapolate that into whether the chain was growing or not.

Another straightforward example would involve using proprietary weather forecasting software to try and predict the global grain/cocoa/coffee/whatever harvest, so that you can then trade accordingly if you can see a bumper crop coming up.

Both of those examples have been exploited to death and no longer are profitable

If the parent had discovered a viable and profitable trading strategy, do you think they would share it here?

I've been out of the loop for a number of years, but I believe there's a serious amount of ML being thrown at predicting time series, so this probably gives you an idea of how money is being made.

I've no idea what the current models look like. I imagine it was all RNNs but maybe transformers have taken over?

True, but they were just meant as easy examples of non-HFT hedge fund strategies.

If a feature is used by many and has a predictable impact on their behavior it becomes profitable again.

If you act faster on the same feature as everyone else, or you predict the feature accurately, you can anticipate what the market will do in response.

The market often overreacts to new data. So if satellite imagery shows steep decline in parked cars, the stock will be predictably oversold. You can then take a contrarian position (buy the stock before it reverses to the mean).

Some commonly used features by popular public trading bots create predictable market movements, no matter if the feature itself is long-term informative/profitable.

yeah but but his point is that hedge funds do things that are non-obvious to extract alpha

There are many such strategies. It's not all HFT either. For example, a strategy that short BTC and goes long ndx/qqq at the open and closes both positions at the close (four trades total), allocating half of capital to each pair, posted a double-digit gain for 2023 despite btc rising. https://greyenlightenment.com/2023/12/31/2023-bitcoin-method...

there are many other things like this. gotta keep your eyes peeled but they exist.

Another field that meticulously tracks their forecasting performance are meteorologists. Jokes about them aside, they do a smashing job of something really hard.

Also we are some hobbyist predictors who try our abilities out on all sorts of questions at metaculus.com. Highly recommend to get a sense of how good some people are at prediction.

At this point algo trading is a race to exploit the other algo created patterns, and is less predicting inherent market inefficiencies as much as fellow algo trading inefficiencies.

Self-fulfilling prophecy is a thing, even when the prophecy is algorithmic.

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