Machine learning is the new new thing. Managing directors are quitting Goldman Sachs for the chance of a one year machine learning residency at Google. Hedge funds are congregating at machine learning conferences, looking for recruits. If you don’t know machine learning, you’re up with the zeitgeist.
But what if the glorious machine learning future doesn’t involve groups of incredibly intelligent and highly paid quants working in offices dispensing avocados on demand? What if it involves groups of incredibly intelligent and lowly paid quants staring at their screens in their dressing gowns, eating instant noodles?
Thanks to Richard Craib, a 29 year-old who runs Numerai, a hedge fund in San Francisco, the latter is now a distinct possibility. Craib, himself a machine learning expert from the near future who studied mathematics at Cornell, has hit upon a way of getting eager machine working homeworkers to help create hedge fund strategies for next to no money.
So far, Craib’s fund has been in operation for a year. During that time, he has reportedly paid his army of stay-at-home data scientists over $150k (implying less than $200k). They’re not paid in dollars, they’re paid in Bitcoin.
Last time we looked (admittedly five years ago), some hedge funds were paying freelance strategists £200k ($254k) a year. So, how does Craib get away with paying all his data scientists (who are effectively building self-learning hedge fund trading strategies) so little?
Simple: he encrypts the data and then harnesses the power of human competitiveness. Using a technique known as homomorphic encryption, Craib is able to send information to his data science army in order that they can develop models to analyze it and create trading strategies, whilst concealing exactly what their models are being used for. The data scientists love it because they like competing against one another: Craib gives them a chance to appear on a league table. “The distribution of funds at Numerai among the top 100 or so competitors, in fairly large amounts at the top of the leaderboard, is quite nice,” says one of Craib’s data scientists, despite the comparatively paltry allocation of funds so far.
Unfortunately, Craib may be on to something. One of his sponsors is the founder of the huge quant fund Renaissances Technologies, who surely knows a thing or two about spotting a trend. On this occasion, quants need to hope his judgement is a bit off – otherwise they could be relegated to a future of competing against each other for a relative pittance.
Separately, Daniel Pinto, chief executive of J.P. Morgan’s incontrovertibly tier one investment bank, has been talking Business Insider. Pinto doesn’t refer to Tidjane Thiam’s strategy at Credit Suisse directly, but it’s pretty clear that he’s not a fan. Credit Suisse is shrinking the fixed income trading division of its investment bank and curtailing its activities in areas like macro trading. Pinto says pretty forcibly that this doesn’t work: “Scale is the key of this business. There is no way that you can become profitable in fixed income by cutting costs or cutting lines of business,” he tells Business Insider, adding that you can’t cut an unprofitable desk and hope clients will still use you for more profitable trades. It doesn’t work like that.
Credit Suisse doesn’t need all its office in London any more. (Bloomberg)
Brady Dougan, ex-CEO of Credit Suisse is launching a new investment bank that will provide trading services. (WSJ)
Gary Cohn is definitely leaving Goldman Sachs for Trump. Trump said he will: “Put his talents as a highly successful businessman to work for the American people” and create policies that would “grow wages for our workers, stop the exodus of jobs overseas and create many great new opportunities for Americans who have been struggling.” (Financial Times)
Lloyd Blankfein’s valediction: “Gary Cohn and I have been partners for more than 25 years, so I know better than perhaps anyone that he has the intelligence, commitment, and experience to be successful at any endeavor he undertakes.” (Goldman Sachs)
Trader talk: ““Im gonna sell a lil more we need to grow our mafia a lil get a third position involved.” (Bloomberg)
Hedge fund wife upsets the neighbours. (Vanity Fair)
Men compete more aggressively against women than against other men. (Independent)