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75 Comments
- ICSU, on 10/12/2007, -1/+18You do realize that a billion is more than a million, no?
- Lnomis, on 10/12/2007, -4/+20Restate my assumptions:
One, Mathematics is the language of nature.
Two, Everything around us can be represented and understood through numbers.
Three: If you graph the numbers of any system, patterns emerge. Therefore, there are patterns everywhere in nature. Evidence: The cycling of disease epidemics; the wax and wane of caribou populations; sun spot cycles; the rise and fall of the Nile. So, what about the stock market? The universe of numbers that represents the global economy. Millions of hands at work, billions of minds. A vast network, screaming with life. An organism. A natural organism. My hypothesis: Within the stock market, there is a pattern as well... Right in front of me... hiding behind the numbers. Always has been. - dorianh49, on 10/12/2007, -0/+14He probably used to work for Verizon; cut him some slack!
- catalysis, on 10/12/2007, -3/+15They have no need for "insider trading." They use the sheer amount of money at their disposal to manipulate the market outright. When you have tens of billions of dollars at your fingertips, the stock market is your playground. These guys are pros.
- Scheissenegger, on 10/12/2007, -1/+12$1.7 billion = 17.000 Hummer H2's = 3.400 Rolls Royce's = 1.700 Bugatti's = 425 4 million dollar villa's = 1 69 year old hedge fund manager....
Damn, the most expensive thing you can get with that 1.7B is quite "not-needed" atm..... Hope I get more later.... - inactive, on 10/12/2007, -6/+17Go to vegas and use math = go to jail...
- superfrodies, on 10/12/2007, -2/+11is his name max cohen?
- Comatose51, on 10/12/2007, -0/+9It's probably much closer to statistical arbitrage, which is akin to casino odds gambling. The idea is that you basically look for mispriced instruments, even if it is mispriced by a tiny amount, say $1 out of $100,000. Then you leverage a position to multiply that difference and pocket the profit after paying the banks. The mispricing doesn't even have to be all the time. It just has to be true in the long run, again casino odds. Hedge funds use some very interest models and methods of making money. I used to work for one of the biggest and hated it because of the people there are just nasty and really egotistical.
- willin, on 10/12/2007, -2/+11@merreborn
Not necessarily the case. The article describes a manager who brought his investors a lousy return of 3.4%, yet got compensated $340 million. There's nothing to suggest that James Simon's returns are as extraordinary as his compensation. - sxtxixtxcxh, on 10/12/2007, -0/+9if you actually did use math in vegas, you wouldn't play. that's not against the law... yet :P
- ksool, on 10/12/2007, -0/+8I don't think the article went into much depth about him outside of his work, but he's a major major MAJOR contributor to the sciences. IIRC, he single handedly prevented the close of the relativistic heavy ion collider at Brookhaven National Labs and has done an incredible amount to help develop SUNY Stonkybrook as a top technical school. I think he's also big in helping autism research.
Definitely responsible with his cash and definitely deserves to be praised for more than just a big salary. - Lnomis, on 10/12/2007, -2/+10You can make plenty of money from a market crash with a technique called "short selling", check it out on wikipedia.
There are also things called "put options" which allow you to do something similar. - fuzzmeister, on 10/12/2007, -0/+8I'm not sure you can say Mathematics PhD == $1.7 billion.
- inactive, on 10/12/2007, -0/+7RTFA?
"James Simons, left, earned $1.7 billion in 2006, more than any other hedge fund manager. Kenneth Griffin, right, made $1.4 billion." - mjl5629, on 10/12/2007, -1/+7They channel funds from savers to spenders, reduce transaction costs, and help to reduce risk.
- toppgun, on 10/12/2007, -1/+7If I earned that much in one year I would retire for life and live in the Caribbean on my boat. I would just sail around being the man.
I like how Warren Buffet claims he, 'Gave his kids enough to do whatever they want but not too much they didn't have to do anything' - melvs, on 10/12/2007, -2/+7I know there are many different approches to using mathematical models to predict stocks, and just as everywhere else in the world, math works. It's crazy to think that something as 'random' as stocks could be modeled and predicted so nicely using math.
- Lnomis, on 10/12/2007, -1/+6Personally, I'd be tempted to work for another twenty years, then dig a developing country out of debt...
- EntropyMan, on 10/12/2007, -2/+7It's not insider trading in most cases, and the few that are can be pursued. Insider trading generally requires knowledge of a company's finances (or some pending deal, news, etc..) before they publish it. But if you could actually predict the future, would that have the same result and be legal. You could also write an AI that read the 10K report or scanned the wire service faster than any human could assimilate the info and that's also legal (and it happens today).
What's concerning is that a) the huge sums involved do tend to attract people bent on fraud, b) it's not clear if this is helping or hurting the economy overall. Either way, it's a huge risk. If hedge funds optimize capital flows, they're generally good and it's worth it if they skim their percentage off the overall growth of the market. If they exaggerate or create unnatural instabilities, then it could be very bad, as some big mistake could unwind and take down a lot of people.
Given that hedge funds have already gotten into that sort of trouble, we have to be very careful. A million little investors all making decisions may in fact be better than a few centralized all-powerful funds that can make or break an entire market. - Comatose51, on 10/12/2007, -0/+5Well, not really. Most of the times they don't invest directly in stocks or equity but on more exotic financial instruments such as derivatives and convertible bonds. Through the use of modern finacial derivatives they can essentially mitigate a lot of the risks associated with investing. The key to a lot of that has to do with the fact that risk doesn't add up arithmetically, which is the principle behind diversification. It remains to be seem whether all these "risk engineering" works out in the long run because even though the probability of a blow up is less, the potential lost is often leveraged, thus the expected value could be quite close to what the average performance for the market is. In the hedge fund business, once in a million years events happen more often than a million years. Look at Amaranth and how they blew up and burned billions in only a few weeks.
- DavidDigg, on 10/12/2007, -0/+4He spoke at Zellerbach hall at UC Berkeley in 2006 last year for the math dept. commencement... he said that during the 80s and 90s he strove to hire scientists and people outside wall st. who would be better at scientific thought or, in his words, "thinking clearly." He wanted people who would be skeptical of a large financial windfall and not attribute to skill that which was more likely due to luck.
Unfortunately these types and some of my friends (UC Berkeley math grad students) are now building and selling and hooking up in strange ways what Le Monde Diplomatique calls "financial weapons of mass destruction" which is another term for credit derivatives. LTCM saw these blow up in 1998; the financial bail-out of that hedge fund was extremely suspicious. Frankly I'd like to see the heads of all the firms that bailed out LTCM try to explain themselves on Capital hill and try to explain exactly what it was they believed they were avoiding.
I have my doubts about just how clear the thinking is. - guillermox, on 10/12/2007, -1/+5No money for schools and other government services?
Are you nuts?
The last problem governments in the US have is a lack of funds.
It's just that they mismanage it so. - bigtizzle, on 10/12/2007, -1/+5Math and spelling. Whoulda thunk?
- mjl5629, on 10/12/2007, -1/+5The company LTCM relied too much on mathmatical models and ended up over $4 billion in debt.
www.en.wikipedia.org/wiki/LTCM
There is a documentary out about this. I think it is called "the Midas Touch." - duggudown, on 10/12/2007, -1/+5WOW!!! NOOOOOOO Freakin way!! Had to digg u down for being soo cool!!
By the way, want a cookie? - laplacian, on 10/12/2007, -0/+3@inboulder: normally you would be right, but this fund has been returning over 34% annually for the past 15 years. I think he's on to something.
- maxpax, on 10/12/2007, -8/+11What? Math is usefull at all? Woohoo.
- TimDigg, on 10/12/2007, -0/+3Very true even Warren Buffet has said the first 10 million was the hardest part and to a large degree involved pure luck
after that though, hard work, intelligence and methodology will take you the rest of the way - geekee, on 10/12/2007, -1/+4"It will be interesting to see these fiat ponzi schemes implode as the petrodollar continues to self-destruct.
"
Do you know what a hedge fund is? - Comatose51, on 10/12/2007, -0/+3Nicholas Taleb would say, "Fooled By Randomness" :-)
The people who make the most out of the hedge funds are the managers, not the investors. The investors take all the risk and the managers only get the upside. If the fund blows up, the managers don't have to pay back their previous year's bonus. Having been a hedge fund employee, I have one advice: Don't invest in them, be the manager instead. - deanbag, on 10/12/2007, -1/+4@rationalxubrnce: Buffett doesn't run a hedge fund. He's actually quite against hedge funds - he talks about this at length in the last Berkshire Hathaway annual report.
That said, I agree with you about one thing, which is that money in a hedge fund manager's pocket would be better off elsewhere. I wouldn't say it gets sucked out of corporation's pockets impacting salaries, though. Rather I'd say it gets sucked out of the pockets of all investors who lost money on those arbitrages where he made money, plus his salary. The total pie is the same: the pie is the total earnings of all US corporations, plus a little bit of international ice cream on top. Investors pay Simons billions in order to increase their share of the pie slightly, and reduce someone else's slice a bit. As a whole it's a zero sum game though, so we'd be better off if there were no hedge funds... but individually the hedge fund investors sometimes do better than other investors. Hence the giant waste of time, money, and brainpower.
@mbmike: I've never understood that argument that distribution of wealth makes no difference, because it all gets invested again. If ten people starve and one person buys a second house and a yacht, is that just as good as if everyone has enough for what they need? In both cases the money gets re-invested, because by definition it must... but I'd rather live in the second scenario, thanks. - vsaint, on 10/12/2007, -1/+4A hummer h2 doesn't cost $100,000
- Comatose51, on 10/12/2007, -1/+4The book, When Genius Failed, was even better.
- bigtizzle, on 10/12/2007, -1/+4Good idea, comrade!
- mbmike, on 10/12/2007, -0/+2The interesting thing is, most of the techniques that LTCM employeed actually would have worked in the long run if it weren't for Russia defaulting, Asian financial crisis, etc.
- mbmike, on 10/12/2007, -1/+3@deanbag:
If you buy the story that this guy "stole" from everybody else (which i don't, and I don't believe to be accurate), at most he "stole" about $5.67 from each American. Consider that his fund is probably playing on a global scale, and his effect is reduced even further. The problem with thinking that way is that wealth is NOT a zero-sum game. Now, to be fair, certain types of derivatives can be zero-sum, but they're being traded by other Math PhDs, not by mom and pop. But, the economy as a whole, and the capital markets as a whole are not a zero sum game. When a stock increases in price from $10 to $15, nobody lost money to make that happen.
There is a lot of resentment of hedge funds, PE shops, etc. and I think a lot of it just comes from the fact that people don't really understand what they're doing. When a hedge fund arbitrages the market, what they're doing is finding slight inefficiencies. But, their action is actually what corrects the "problem." Likewise, when a PE fund buys an under performing company, they aren't trying to "raid" it Wall Street style like so many people think. Really its about unlocking the existing capital structure to let it be more efficiently allocated elsewhere. Then the PE firm and their investors/lenders have assumed the risk to turn an underperforming asset into an overperforming one. It's really about squeezing as much efficiency out of the market as possible. These guys just get paid a lot because there is a lot of risk involved and some unique skills. Plus a lot of the time the lifestyle isn't that great for those in high finance. I-bankers work 100+ hour weeks, hedge fund guys have to live with the possibility that they could lose millions on any given day. It's a very stressful lifestyle that a lot of people just can't handle. But they get rewarded accordingly. - catalysis, on 10/12/2007, -1/+3When you sell short, you still need someone to buy the stock though.
- laplacian, on 10/12/2007, -0/+2@willin: did you even rtfa?
"Even though he has some of the highest fees in the business — 5 percent of assets under management and 44 percent of profits — he trounces most of his competitors year after year. In 2006, the $6 billion Medallion fund posted gross returns of 84 percent; 44 percent after fees, explaining his $1.7 billion take." - HedgeFundDomain, on 10/12/2007, -0/+2Regarding this comment.........
by willin 32 minutes ago Block/Report this User
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@merreborn
Not necessarily the case. The article describes a manager who brought his investors a lousy return of 3.4%, yet got compensated $340 million. There's nothing to suggest that James Simon's returns are as extraordinary as his compensation.
......considering more than half of his earnings came from return on his investment (personal assets in the fund) you can rest assured his returns are extraordinary. - outhouseinput, on 10/12/2007, -1/+3GREAT. Now when I tell my math teacher that math is useless he gets to say some old guy just made 1.7 billion dollars with it.
There goes my "this doesn't apply to my life" argument. - wwwaddedsavings, on 10/12/2007, -0/+2I wonder is there's is an open source magament wealth system to help day traders?
- mbmike, on 10/12/2007, -2/+4You clearly have no clue about how the economy works.
What do you think happens to those $1.7 billion? Unless he pulls everything out into cash (which is pretty much not possible), the money keeps circulating through the economy.
At worst, it's in bank accounts, where it's getting recirculated in the form of loans to corporations and people. If it's being loaned to people, they're buying houses and consumer products, which helps companies' top line, which in turn helps them hire more people and pay higher salaries. If the money is loaned to corporations, its most likely being used for new capital investments, which lead to higher future levels of output, more jobs, higher wages.
If his $1.7 is held in stocks and bonds, its pretty much the same the same situation.
He's pretty much making up for the fact that the average American doesn't save...at all. There's a trade off between current production and future consumption. Saving/investing lets the economy as a whole consume in the future, but most Americans don't realize that.
Plus, there's this nice little identity: Savings - Investment = Exports - Imports. Want to reduce the trade deficit/stop borrowing from abroad? Then we need to start saving more at home so that our companies don't have to look abroad for capital. - inactive, on 10/12/2007, -0/+1Certain mathematical formulas are worth millions on wall street. There are many funds that are comprised solely of banks of computers automatically buying and selling stock according to their individual formula. When you've got 100 different formulas running at the same time there's a chance you might be buying and selling the same stock at the same time, but its the overall result thats important. Firms that are purely automated like this are the epitome of "making your money work for you."
- NewzClewz, on 10/12/2007, -1/+2Yes kids, math is helpful. Do your homework so you can grow up to be a Billionaire Hedge Fund Manager!
- merreborn, on 10/12/2007, -1/+2"Damn, the most expensive thing you can get with that 1.7B is quite "not-needed" atm..... Hope I get more later...."
Do you realize how much money this guy could make you? He earns that much, 'cause he generates far more than that in profit. - madgamer01, on 10/12/2007, -1/+2Well, you're the buyer when you choose to cover your short. You're serving as the buyer for whoever sold you the original shares, usually the major brokerage places.
- yellowsnowcone, on 10/12/2007, -0/+1Here's what I gathered from the article:
1. The fee structure is way out of line for hedge managers. Why should someone who earns a 3.4% return receive more than $300 million in compensation? Anyone of us on this board can do better than that. And that leads me to my second point.
2. Institutions are wasting our money paying these huge fees. If you are a private individual and want to pay huge fees to an expensive hedge fund manager, than so be it. But if you are the manager of an endowment or pension fund, you're wasting money. I really have to question the relationship between these decision makers and hedge fund marketers.
3. What is the overall return for the entire hedge fund industry? We hear about a few managers who are doing well, but how does the industry overall perform against a benchmark such as the S&P 500? We've seen studies that say more than 80 per cent of managed mutual funds fail to perform better than the market. What about hedge funds? If the figure is the same, then are their huge fees justified? - floorman56, on 10/12/2007, -0/+1Do you know what the tax is on 1.7 billion?
- sheriffbob, on 10/12/2007, -0/+1can someone please seed that torrent.
- mjl5629, on 10/12/2007, -0/+1Here a link to the BBC synopsis:
http://www.bbc.co.uk/science/horizon/1999/midas.shtml
It's actually called "the Midas Formula". You can find the torrent online. -
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