Financial markets offer countless ways of making (or losing) money. A key distinction among them is the investment horizon, which can range from fractions of a second to years. Walnut Algorithms and Global Systematic Investors are new investment management firms representing the high-frequency and low-frequency sides, respectively. I sat down to talk with their founders about investing, data, and the challenges of starting up. Below is my talk with Guillaume Vidal, co-founder and CEO of Walnut Algorithms.
We are on the cusp of an exponential shift in machine learning, the ability of a computer to automatically refine its methods and improve its results as it receives more data. For the last couple of years, technology giants such as Google, IBM and Microsoft have been in an arms race to construct artificial neural networks that mimic the human brain. Increased computing power, combined with access to very large data sets and advancements in machine learning algorithms, have augured in this new era. We can expect to see a surge in deep learning startups focused on areas such as speech and object recognition, robotics and finance. In the secretive world of hedge funds a very large artificial intelligence play involved Bridgewater Associates, the world's largest hedge fund, which launched a six-strong AI unit led by David Ferrucci, who joined the fund at the end of 2012.
In spite of the considerable funds that are at stake, trading is one of many domains of human activity to be affected by cognitive biases. What traders believe are valid judgements may in fact be the results of effort-saving mechanisms by the brain. Supposedly rational decisions may stem from mental shortcuts that ignore chunks of information, which can then have a significant impact on traders' results. Recent research in behavioural economics has identified dozens of common biases that can impact investment choices and practices. One of the most common is the disposition effect, where traders choose to sell and make profit on shares that have been going up in price for some time, while holding onto shares that are in steady decline, waiting for them to bounce back.
Most of the world hates inflation. The Goldman Sachs Group Inc. partner is a leading practitioner of the obscure art of inflation trading, a niche business that's exploded -- very lucratively -- for some of the world's major banks and hedge funds. Choraria, 38 and based in London, orchestrates often-complex transactions designed to profit from gyrations in inflation. Over the past year, his team picked the right side on trades underpinned by the biggest inflationary spike in decades, which convulsed the global economy and even blindsided some central bankers. They helped generate $450 million in revenue in 2021, twice what they made in previous years, according to people familiar with the bank.