Predicting Jim Symons with CrystalVol :
999 Financial Predictions for the Investment Universe Feb 12 , 2009
BrainCapital Technologies (S) Pte Ltd
Smashwords Edition
Copyright 2009 BrainCapital Technologies (S) Pte Ltd
Smashwords Edition, License Notes
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To create out of this world returns you need to create a new world order of trading . And that is what Jim Simons and his brethren has done .
Wealth Warning ; Hello Fellow Quants ! Join the Lucky Draw here to be the next Jim Simons .Reading this Book can make you a Hedge Fund Billionaire .But it will be a rough ride reading this book . Pardon me , Traders and Mathematicians make poor writers and I am both . Besides errors of all sorts , there will be parts that would be kept deliberately vague to protect certain secrets . But to read it, is a wonderful Opportunity for yourself and I say it is your good fortune to be doing it .
Ultra High Finance For Ultra High Net Worths
& Hedge Fund Managers
Visit http://www.dealingmachines.com
Copyright © BrainCapital Technologies (S) Pte Ltd
This book is dedicated to
Dr. Jim Symons
Dr. Gerald Chan ,
Dr. Bill Fung
And All My Hedge Fund Clients
Synopsis:
1. Genesis . Behold , This Book is Taboo . A sort of Forbidden Fruit . The Chinese believed that for those who learn or reveal the secrets of Nature and foretell the future , their lives can be shortened as a punishment or compensation for inequalities caused . Abandon while you can ? Or stay the course and be students of science and maths to Master the Markets of the Future . Your Choice .
Part1 . Chapter 1 . Looking for Jim Simons .
In the Beginning Jim Simons created the Chern Simons Theory and started with String Theory . What is String Theory? Even if I can explain it to you , 99.99 percent of the world would not be able to understand it . For me , it meant that numbers can represent the world and prove the existence of GOD and ORDER . That is String Theory for me . The prevalence of order within the universe and financial markets with a unmistakable and repeatable pattern in crystal clear formation of 66.6666 percent . Wait a minute , most people would not understand this but as you the reader go on further you will see that this is the key to making money real money real fast . And it has to do with using volatility as a crystal ball to see the future . Hence the idea of using CRYSTALVOL to Predict what Jim would do in Financial Markets .
I will do better than try to explain string theory . I will show you how a look forward predicted string of 3 to 6 points for an individual stock makes money within 1 to 9 days .
At the onset of this book , I want to make an important disclosure . Before writing this book I went thru an elaborate debate of sorts . One part of me told me , there is no profit in writing this . This Simons Series of Books about Predicting what Jim Simons would do in World Financial Markets probably has an audience of less than 10000 . 10000 is the total number of formally incorporated hedge funds in the world which i am interested to target at . This reasoning was offered by my Trader Self , always calculating and looking for the money rationale and money path . The other half of me says to do it , The man , Jim Simons deserves it and the world deserves to know as well . The world should not begrudge this man who has made 8 Billion dollars from financial trading . If it is not Jim , it would have been somebody else . The fact is Jim has done it far better than anybody else has done Far better than Warren Buffett or Geroge Soros .
So what are his secrets ? How did he do it ? What is the true nature of Jim that makes him so good ? The short answer is that he is always looking at predictions as a science .His methods do work from a scientific and mathematical viewpoint harnessing the natural sciences of mathematics , science and even as diverse a field as lingusitics. If there ever was a Mathematical Idol for our young kids to aspire to , Jim Simons could very well be that idol to look up to . He is certainly It ! He proved that with powerful maths and science , you can actually make a lot of money intangibly without making anything or producing any material good . Besides the attractive notion of no sweat , more time and more leisure lifestyle , his method in some sense is also world environment friendly to all .The trees and all the natural resources of the world are all well protected within his money generation machine.
He proved the ultimate theorem that Maths wins and triumphs over markets . He is far better than Soros and far better than Warren Buffett and volumes have been written about these 2 gurus . It is my firm belief that my book series contribution on Jim Simons would actually add value to the world while detracting from the world some bandwidth and deplete some paper and wood . But my clients and some friends actually try to dissuade me , saying that this book would be dangerous and fruitless Explaining such esoteric stuff to the masses would be unfruitful and may even be misinterpreted . They explained that they have always known me as an artist . And they say they know me better than an artist knows himself . They attribute my book effort as some effort to do creative destruction to the artist in me . At first , I found the term artist a bit contradictory to my training as a scientist . But then ,coincidentally , I remembered ironically that the Renaissance Man ( ideally and seemingly from Jim Simons Firm Renaissance Technology ) is supposedly both artist and scientist as well. My altruistic part of me says to do it . Do something good for the next batch of Jim Simons that I hope will emerge from Asia . If Li Ka Shing 's Son Richard Li boldly calls his firm Pacific Century , then I boldly predict and hope the next Jim Simons could come from this Asia Pacific . I want to take on the risk of letting more people know about the technologies that could have made Rennasisance Technologies so rich and powerful . Besides it would be fun . The creative side of me added . Since he is going to retire sometime in 2009 , I want the world to feel his presence by writing a series of books that would predict what he would do in each major market , US , China , India , Brazil .
While these delicious thoughts crowd my day dreams of Jim Simons , a series of phone calls woke me up to something more serious in the making . My hedge fund clients ,who i collect a fee for generating look forward scenarios under braincapital technologies , start to ask for more . Suddenly , there was a Demand Spike ! Suddenly these clients who maintain a confidentiality blank , a safe distance with little conversation from our little firm , became more interested in our methods and wanted more . They wanted us to extend our my current offering for 3 volatility indexexs ( VIX VXO QQV ) and 3 ultrashort ETFs ( SDS , DXD , QID) . Now they want entire world markets . On further questioning I was beginning to know why. For the last several years they had secretly done in excess of 33 percent returns using quantitative methods . By 2005 , I suspect that some my clients got lucky and manage to secure some clients which Rennaissance Technologies ( Rentech) had let go . Let Go ? . What do i mean by this ? When did i ever hear of any event when a money mangement firm would actually want to turn away clients ? The answer is : When the firm gets so successful . And the firm knows that the Game is no longer about gathering assets . The Game is now about gathering Brains that will outhink the market several steps ahead and maintain their leading edge . My wild guess is that getting rid of clients is actually a good way of keeping the firms secrets away from the marketplace . Sometimes , clients so called "right to know" may result in difficult situations where key secrets may be leaked . Besides that , clients have an easy way out as it is their money and they have the right to flee on their own free will . From what I heard , Jim Simons's Rentech got so successful that they need not need any more external clients . So they actually insist on a 5 percent mgt fee and 36 percent profit participation in order to softly tell the clients to go elsewhere. Rentech 's very high fees is a very strategic and gentle way of saying , Thanks , we do not need your money anymore . Thank you very much . And perhaps by a stroke of luck ,
a few of these quant based clients then became clients of my clients . In 2009 when Jim Simons announce his retirement and leave the running of the firm to 2 deputies , my clients felt that it would present even better opportunities to expand their business Jim Simons Style . I finally decided that I did not want to remain unknown while my clients secretly build the returns from them .My clients who run smaller sized hedge funds did far better than mega funds during the crisis period of 2009 to 2007 . The mega funds stopped trading and even forcibly took money off the tables while the markets faltered on the financial crisis fallout from Lehman , SubPrime and CDS defaults . My clients traded through the crisis and trusted the models . And it held up well during the crisis years . In fact it had the best performance as volatility imploded and then subsided just as unexpectedly between 2007 to 2009 . On record , i am delighted to note , the models did as well as it did for its 20 years track record history . Thus I decided that this book would be a revelation of sorts. Revelations 1:18 reminded me always that the models have mastered death crisis and real life trading . They are now proof of living science and inspirational maths for us to look forward to . Through this series of books , I also want to make clients feel more at ease as they see the models work day to day like a livemarket working ahead of itself 5 days into the future . I want to make clients understand in simple language and also do a walk thru live for each market Jim Simons style in order to show how markets can be tamed by understanding humans rather than understanding the market numbers. This is the Biggest Secret of them all . Markets are not predictable . Only Humans are predictable . What do I mean by this ? Greed and Fear of Humans can be modeled and I believe very strongly that it is this taming and timing of both Greed and Fear that has driven quant firms like Jim Simons to do extremely well . Go thru this book and you would understand . I have to say that revealing the truth directly is not my main preoccupation . You have to be looking for it within this book . You have to be looking for it and the meaning will come to you .
Writing this book presents the opportunity to be sandwiched between 2 heores . Jeff Bezos who founded Amazon is betting on the Kindle for ebooks while Steve jobs thinks that people do not read anymore has successfully created the Ipod which displays great visuals . I hope to satisfy both ideals of Steve and Jeff . I have created this ebook series to be read on the Kindle and Ipod . I have also supplemented the ebook with pictures and visuals that display look forward scenarios for up to 10 stocks ( Page 33 or Chapter Revelations 1 : 18 ) and also create a stock path for each stock within a 999 stock universe ( Page 66 Revelations 1: 18 ) . It is a tall order and PDF format is the preferred platform for this challenge . Some of you may want to read every word to understand these technologies better . Some of you will just want to see the look forward patterns and scenarios on the Ipod or Kindle or Mobile Phone and be startled when the look forward scenarios come out as predicted within 5 days . I would also show you the history of patterns ,Page 55, where the patterns have turned out well as predicted .
Lastly , my main motivation to write this book is to inspire the young , especially my 3 kids 18,15 and 10 . All three of them have a very strong affinity for mathematics . I want to tell them the real story which may seem like a fairy tale when told in todays fast changing and practical world . Indeed , this is the real story of how a group of scientists and mathematicians got together , used Other People's Money first (OPM ) , and then later on made so much money together that their own brethren band conceive to keep their secrets safe within their own by devising their own corporate body of scientists , mathematicians and brains.
And the young may ask me innocently why should they care? And I snipe back with equally sinister wonderment . I told them : Listen Carefully and Learn , because it can turn 1000 dollars into 1m and 1 m into 1 B . within 3 years .
And I tell them that anyone should care because anyone can become the next Jim Simons .
Anyone can become Jim Simons , but only one or maybe 2 will be lucky to be chosen from the lottery draw . If you read Jim Simons Story or Lucky Draw ( which he constantly acknowledges ) , you would understand that to become Jim Simons , one must first enter the draw and then let the heavens choose you. Within a cacophany of events , a Jim Simons will emerge finally . Singapore , my beloved country , is the place which places heavy emphasis on Science and Maths at a young age . Singapore produces scientists and mathematicians on a grand , world class scale. Singapore is a very good place to be in if you want to be in for the lottery draw for the next Jim Simons prize. I want to inspire these scientists and mathematicians to take on the financial world Gladiator style and emerge as the next Jim Simons Star . 8 Billion dollars in 8 years , that is a very worthwhile thing to pursue in life and you the young scientist and mathematician would also need the right humanities training in spirit and soul to survive thru that long trek , Gladiator Style .
Part 2 Chapter2. Understanding Jim Simons .
Acts By these acts , people will know you are my disciple .
History Precedes the Future . History is the only certainty in this world , for it has happened .History offers the only way to predict .While History does not always repeat itself , it indicates to some good degree , the way of the future.
A bit of history about myself and my country which I am so proud of.
My name is David Lee Chay Tiam , founder of braincapital technologies a provider of learning technologies for the hedge fund industry.
I am the sole recipient of a Singapore Merchant Banking Scholarship which led me to training stints within the trading houses of Chicago and New York . At our last valuation my firm was valued at 16 M USD by a leading global Venture Capital firm .We supply trading technologies to the world 's leading Foreign Exchange Banks and a top program trader who traded 12 percent of the NY Stock Exchange .My former chairman was one of 2 brothers that came from a multi billionaire family . My former director was a leading professor of finance and hedge fund manager himself . That was all in the past and for the future I have a hazy feeling that it would be even more shimmering bright than before . I bet that it would make the glorious past seem like a tiny sparklight from a remote eclipse . And I am also proud to say on a publishers platform that I am a Singaporean who retired and migrated while in my early 30s , to the very good quality life in New Zealand . What is even more special is that I actually came back to Singapore . I gave up the very good life in NZ to become a Singaporean again . I am proud to be a Singaporean citizen having seen what my country has done in the wake of the financial crisis of 2007 to 2009 . I am proud of our tiny country which started with no natural resources, except for its people . I am proud when it showed her might and power by buying significant stakes in the worlds leading financial instituions in UBS , Citi and ICBC . These are very important insitutions which the very foundation of world finance rest upon . These are very important pillars of international finance and infrastructure . I believe very firmly , that this small country of ours , would throw up the next Jim Simons .Singapore is at the crossroads of international finance . We can tap into the latest technologies of the west and then deploy in the emerging markets of the east where the players are fewer and there are more profit opportunities My son at 18 years old will be doing Maths almost like phd level . Son , this is for you and I do hope you become the next Jim Simons .
A bit of history about Jim to get acquainted and inspired . James Harris "Jim" Simons (born 1938) is born into a Jewish family. He is the grandson of a shoe factory owner in Massachusetts, received his B.S. degree in mathematics from the Massachusetts Institute of Technology in 1958, and his Ph.D. degree, also in mathematics, from the University of California, Berkeley in 1961 at the age of 23. Between 1964 and 1968, he was on the research staff of the Communications Research Division of the Institute for Defense Analyses (IDA). After that , he taught mathematics at the Massachusetts Institute of Technology and Harvard University and was appointed chairman of the math department at Stony Brook University.
Jim ‘s favourite story was about using 5000 USD of his marriage presents to play the market. This revealed an important characterisitc about the trader in him . It revealed that he was very much a risk taker at heart .This is one quality which is a must have if you want to be a good trader or good fund manger. Secondly , Jim likes to tell that he started with 600 K and grew it 10 fold . Whether he did it himself or someone did it on behalf of him , it did not really matter . What matters is the very signal that one will get in life if one can experience his early success with markets . It is definitely an affirmation of his calling in life and he is very lucky to get such an affirmation very early on . He calls it luck . I , like any other human being would say , that Jim is particularly blessed to know his calling early in life and the 10 fold return gave him a very strong boost to his self and self esteem . He simply stuck himself to the markets for a very long time and finally became the expert that he is today . A money master of markets. The same sort of luck followed when he started his formal money management business . The Medallion fund started in 1988 with 25 million dollars when Jim is around 50 years old . Nowadays fund startups of 1 Billion are quite common if one has a successful trading track record with a Major Investment Bank . But alas , my own view is Big Capital need not be the only ingredient for success . In fact , with a smaller capital base of 10 m , i believe a hedge fund startup can concentrate on commodities and currencies , Ultra Long and Ultra Short Etfs and be very good and specialized with that small capital .Jim Simons numbers from 1990 to 2004 have been most impressive , in fact , out of this world . Renaissance's primary hedge fund, called Medallion, has delivered annualized returns of 33.21 percent. (The Standard & Poor's 500-stock index has returned, on average, 10.98 percent during those same years.
Going by his numbers , Jim Simons is probably the most successful hedge fund manager of all time. Before the 2008 market crash that decimated the hedge fund industry, Renaissance Technologies had a staggering $36 billion dollars under management .Going by public records , James Simons made $670 million in 2004, $1.5 billion in 2005, $1.7 billion in 2006, and $2.8 billion in 2007. As head of Renaissance , Jim Simons will retire with a net worth of around $8.5 billion dollars. In one public disclosure , He was in discussions to sell a stake to China 200B China Investment corp .
The
world is full of math geniuses and good traders . Once in a while , a
trader will emerge with these sort of Jim Simons numbers if only all
the stars align in his favour . I learn this phrase from Joel Kellman
, a leading VC lawyer based in Silicon valley . Jim Simons is very
blessed very early in life to have found the right calling and gotten
very lucky with a 10 fold return with a first initial investment of
600 K . He was also extremely lucky to diversify from commodities to
equities trading in 1993 and caught the 1996 equities liquidity boom
. And then made most of his 8 Billion ( roughly 6.67 B ) from 2004 to
2007 before the markets melted away in the crisis years of 2008 and
2009 . It is probably no coincidence that by returning All of Other
People 's Money in 2005 , he could maintain a tight rein on his firm
trading secrets and thereby increase his networth and wealth
exponentially during 2004 to 2007 . And taking the decision to
retire at the age of 71 in the year 2009 is probably also very wise .
The world where his talents can best harness in wealth extraction is
no longer there. And so , the world he best operated in is no longer
the same . The world liquidity has been severely reduced by the
financial crisis of 2008 and 2009 . Post 2009 , the world has lost a
lot of private wealth from Lehman ‘s demise , UBS fallout ,
MADOFF PONZI SCHEME and the near death of Citi and AIG . Even oil
rich Dubai has problems paying its 50 Billion debt . The master
gambler and mathematician must have done his final calculation and
decided to cash in his chips . His immense luck , skill , talent and
success , all that has happened has happened spectacularly in a way
that i can only described as being mightily blessed by the heavens .
What I can never understand is that despite all these good events
that has happened on him , to my knowledge , Jim Simons has never
publicly attributed his success to the grace of GOD Almighty. That I
cannot understand , how so , for a man who claims luck as his main
asset .
Part 3 Chapter 3 . Predicting Jim Simons .
999 Financial Predictions for the World with 66.6666 percent accuracy
For
a long time I have been following Jim Simons . Having been a quant
myself , I understood his methods better than others and felt that a
book about him would be something I love to do . It would do justice
to the greatest trader of the last 2 decades .
But doing a book about Jim Simons is more difficult as quants are always elusively quiet .; They see and think the world in terms of numbers and not in prose or language . In some sense , this nonchalance to speak is good for the protection and maintenance of their trading secrets and methods. needless to say , silence is also great for the concentration
of their science and maths . As a scientist myself , this meditative silence is important to us scientists as we observe the world silently without emotion and try to understand what the natural world phenomena is telling us or not telling us . That I believe is the training and attitude Jim Simons brings to the trading world . Indeed a very different method that is being practiced by most of wall Street . For this reason , Jim Simons works with scientists, not traders and is credited for saying "We use a lot of mathematicians, physicists, astronomers, computer scientists. We haven't hired out of Wall Street at all." For Jim Simons , there was also an aura of secrecy as all of his staff have to sign very strict confidentiality clauses .
It must have been very difficult for mathematicians to start off in the money management business . But Jim Simons is also a master in the art of persuasion by first acknowledging and addressing client fears . Jim said : Clients are willing to keep giving money to human beings to manage because they understand investing based on human judgment. Or at least they think they do. But black box investing feels different. It feels scary somehow, precisely because it is not something most of us can understand. He then wins clients over by illustrating that black boxes are not something to be afraid of because every human being has a black box called : "The Brain ". "Models can lower your risk." Jim said that quant trading in some ways is less mysterious because it can be programmed . And as a quant myself , may i also add that models can be tested for resilience and profitability as a model before it goes out there to be traded .Models reduce the daily aggravation. With old-fashioned stock picking, Jim said that : "One day you feel like a hero. The next day you feel like a goat. Jim also said that Medallion sticks with highly liquid securities that trade in public markets around the world. Why? "Because there is a lot of data on such instruments, and we're very statistically oriented," Jim Simons stays away from exotic derivatives as these exotic derivatives as commonly promoted to private banking clients are very opaque and hard to trade . Only the originators of exotic derivatives understood and control the pricing mechanism of these instruments . True quants would not touch them because they cannot be measured and verified independently with the scientific statistical method . Jim Simons has got a highly diversified portfolio, high turnover, and he's capturing small inefficiencies. It's hard to lose a ton of money doing that. It is always possible that someday his models might stop working. But that's different from 'blowing up.' Indeed, trading the way he does, making thousands of small trades aimed at capturing small price movements, doesn't generate the kind of "10 bagger" that investors love. But when done well, quant investing is less likely to have the kind of disaster that is always the danger when one bets big on a stock. To illustrate , Jim 's Mehod is so different from the Warren Buffett method of loading big on an undervalued situation . During the depth of the financial crisis Warren Buffett made a big Bet on Goldman when it was floundering . Warren Buffett must have betted that after AIG risk was exposed on Goldman books , there was no more skeletons in Goldman Sachs closet . But what if there was another hidden skeleton ? Warren Buffet would have lost Big . Jim Simons method would be quantitatively based . His models would actually buy and sell different quantities of Goldman at different periods and prices together with other financial stocks .
By then we’d decided that systematic trading was best,” he explains. “Fundamental trading gave me ulcers.” Trend-following is not such a good model. It's simply eroded." Things change and being able to adjust is what made Mr. Simons so successful. "Statistic predictor signals erode over the next several years; it can be five years or 10 years. "Speculation comes in and destroys trends. I am a speculator. It accelerates the trend. It gets you closer to the truth faster," he said.
Here I would use my quant knowledge to explain the significance of those statements in his trading method . Jim Simons is well known for trying to explain String Theory as a Universal Theory governing the laws of the Universe . He also constantly refer to a 3 D Geometry Structure where the parameters affect each other dynamically and give way to non linear aspects of market behaviour. This simply means that markets can suddenly roar into action when you least expect it and without warning go into deep sleep low volatility ranges when you least expect it . In my quant understanding , the 3 D structure refers to the interplay of Price , Time and Volatility . Of the 3 Volatility is a stochastic mathematical function and can best be modeled within its 20 year history and modeled as an indication of human greed and fear as captured by option pricing valuations shown in the VIX VXO and QQV . If you are a hedge fund manager , you would probably understand what i just said . If you do not understand , you can read more about Volatility and Stochastics using Google Search Engine and then come back to read again on what I have just disclosed .
Jim
Simons says that : Certain price patterns are
nonrandom and will lead to a predictive effect." I believe he
refers to the fact that volatility is always mean reverting and we
can use learning technologies to learn the historical patterns of
volatility and make pretty good estimates of Volatility future price
scenarios .
Using Volatility as the key driver , we apply the predicted volatility to anticipate the price pattern and path for each individual stock . Looking at the predicted price of each stock we choose the ones with the least error margin as candidates best selected to long or short . And we can influence the candidate pool by preselecting and using what Jim Simons refers to as the long end of the frequency spectrum and integrate with elements of fundamental analysis such as balance sheets or income statements.
While we know for a fact , that one cannot predict with great certainty on 1 security price pattern , one can do so quite effectively with groups of stocks , thousands , hundreds or just using a handful of 10 stocks . Through our models we have been able to reduce risk and enhance returns with just 10 longs and 10 shorts and using a capital size of only 10 million for start up hedge funds .
I will now try to use my quant knowledge to illustrate what Jim Simons says about Fundamentals Trading giving him ulcers and Trend following is unreliable as Trends change every several years . And lastly , I would illustrate the importance and beauty of speculators like him. That Speculation comes in and destroys trends. Speculation accelerates the trend and gets you closer to the truth faster,"
Combining all those remarks in the light of my experience as a quant , I believe most traders have experienced events where stock prices actually rise after bad news on earnings are revealed . And also on events when Stock prices drop when good earnings are revealed . So has the world got mad? The truth of it is there is no 100 percent guarantee that stocks will react to fundamentals , as fundamentals may already have been leaked by insiders and the price already built into the fundamentals a long time ago . So as Mathematicians , Jim Simons did not want to trust the 1 time bet on fundamentals but prefer to trade the markets over a series of time horizons at different levels. As for trend following , the field is often very crowded as it is a very old method . Trends may seem to work well . But when they break down , there are too many players wanting to get out at the same time and this leads to very severe gaps in pricing called slippage . This can hurt the performance of the fund as the equity line can take a big hit from one single time when the trends break down . Jim Simons method then is to assume that every share price has a 3D geometric symmetry which can be predicted within some degree of correctness . Remember he needs not be wholly bull or bear in the traditional way . Not at all . By adopting a pure mathematical approach , he can use learning technologies , to learn the volatility and structure of markets and securities and make a prediction of the price in the next 2 out of 3 periods or the next 9 periods . Then he can classify those securities that meet a certain criteria say up for 3 consecutive periods or 2 UP Pairs within 5 periods . And to reduce his risk he can make multiple predictions for each security so that he can have a degree or shade feel about the market . Best of all he can use maths to predict on monday what it would do up to wednesday . And then on tuesday use it to predict what it would do up to thursday and on wednesday use it to predict what it would do up to friday . So i think you would get this picture in your mind . The mathematical trader will have a rolling forward picture of the market unfolding . His view of the market could be to go long 10 stocks and short 20 stocks on monday . Then on tuesday his mathematical reading could be to go long again on 10 stocks but short 30 stocks . Take note , he would be using the same capital size and distributing over 30 short candidates instead of 20 stocks . It does not indicate he is more bearish .on Tuesday than on Monday . He does not need to have a view . So the net effect is a portfolio looking more like a rolling forward movie of the markets at play .
And it trades like a movie in the following format . From a total size of say 100 m , the entire portfolio is divided into 16.6 percentage portions with a trading horizon of 6 days (16.6x6 =100) So long 16.6 m on 10 stocks ( 1.66 m per stock ) Short 16.6m on 20 stocks ( 0.83 m per stock ) , Tuesday long 16.6 m on 10 stocks and Short 16.6 m on 30 stocks (0.55m per stock ) . The math money machine is essentially striving for market neutrality all the while . This whole movie of longs verses shorts can be seen within an excel spreadsheet . We generate this movie spreadsheet for our client almost every week if not everyday so that they can see the entire risk management metrics of twenty years within one spreadsheet .
So by now , you , the reader can see and understand that this is an entirely new and different trading world order i was talking about . It is a highly diversified portfolio, with high turnover, and capturing small inefficiencies. And the important thing is that it is more efficient and systematic than the 1 time bet of fundamentals trading . And in fact , most important of all on the risk management side is that it 's hard to lose a ton of money doing it this way .
I also want to emphasize that this sort of new trading world is quite rare in the hedge funds world unless the founders themselves and the traders come from the same knitting of mathematical and quant trading .
The typical hedge fund is the traditional wall street model type where you cannot have buys interspersed with sells . The auditors may not allow it ,. Or management may not allow it as they cannot understand how to explain it to clients . They may not know how to monitor it for performance . If the top says you cannot have longs interspersed with shorts for clear audit reasons and mandate reasons then you cannot have that and your portfolio suffers for it ,
Most traditional hedge funds also do not have the mathematical ability to use time and volatility interplay . Here I like to quote Tom Preston from thinkorswim trading platform .
Volatility is how much variability there is in the price changes of the
stock or index. The more variability there is, the higher the volatility.
A good rule of thumb is to see volatility as representing a 1 standard
deviation move in the stock price in 1 year. Statistically, about two-thirds of the
occurrences will be within plus one and minus one standard deviation.
So, if you see a volatility of 40%, it means that the stock will theoretically
be within approximately plus 40% and minus 40% two-thirds of the time. If the
stock price is $50, and volatility is 40%, two-thirds of the time the stock will be
between approximately $30 and $70.
With quant models , the mathematicians already calculate a price profit point to take before each trade is entered . Using a volatility model when the profit is achieved in 1 day and statistically difficult to achieve more profits , the trade is exited and profits taken .
In contrast , for the case of traditional funds , they probably add on to their positions when they see or think a trend is building up .
So what do the humans do ,? If computers are doing the main part of the job ? The humans keep adjusting the portfolio to make it market neutral . The Humans can decide to keep the portfolio slightly more long , 10 M long vs 8 M short especially when the long term trend is still intact( example Key Index levels still above Moving Average 199 and Moving Average 49 but temporarily the market drop below Moving Average 9 because of unexpected jitters )
The Humans decide the composition of the Long portfolio and short portfolio .
A long dow in our model portfolio can be replicated by a portfolio of good fundamental stocks with increasing relative market strength that would outperform the dow or sp500 index . Likewise for a short dow or short sp 500 position , the humans replace it with stocks that have bad fundamentals and decreasing relative market strength .
A long Volatility position can be replicated by a portfolio of Ultra short ETFS like sds , dxd and qid . Similarly for a short Volatility position .
The composition of Ultra short ETFS to replicate the volatility position can also reflect and support fundamental research and financial .For example if research shows that Financial and Real Estate ETFS are undervalued verses Biotech and Retail ETFS , then always keep Financial and Real Estate Ultralong ETFs on the Long portfolio and Biotech and Retail UltraLong ETFS on the short side .
All of us hunger for a holy grail that would solve all our problems . the elusive search for a magic bullet to ensure we get 3 percent per month and 33 percent per year to become a Jim Simons .
On a case by case basis , we have 5 ways to predict the future on a stock by stock basis .
The Relative Way . One leg swings the other . In A shaped pattern if the first leg as predicted up is flat then the second leg is DOWN
The First 3 points Way , In an uptrend notice the first 3 points of prediction is always up for the predicted pattern . Stick to the prevailing trend and leverage n it
The Skinny Way , The most Skinny leg represents the pattern points with the least error and forms the prevailing trading fractal . The Skinny leg usually forms part of a HCP pattern ( Highly Confident pattern )
The Convergence way , When the Volatility indexes predict UP and is Confirmed by Down Predictions in Indexes dow and sp 500
The Momentum Way . This is one of the 3 Issac Newtons ‘s law at work . When a body is in motion it continues to be in motion . When stocks are in motion , they continue to be in motion . No need to ask why , Just profit from this second law . For example select stocks that move 5 percent in last 3 days to be within the long short portfolios . Stay away from stocks with low volatility . As a Momentum Selector Factor ,Use 8 percent for Ultrashorts candidates .
What is the magic bullet ? and what is Jim Simons Simple Secret ?
The magic bullet is to long and short a series of stocks that have distinct patterns under the B 3 consecutive model or C 2 pairs within 5 . Long the ones with at least a 222 rating signal and short the ones with at least a 111 rating signal . Use the volatility index first 3 numbers as measured from the first point to determine if volatility has tendency to go up or come down . If 2 of 3 numbers are lower than the first point of VXO , then volatility is going down , and vice versa . If 2 of 3 numbers are higher than the first point of VXO , then volatility is going up . The best strategy of benefitting from increasing volatility is to buy puts especially those that are at the money and slightly out of money . This can become BLACK SWAN multibaggers of 500 to even 1000 percent when indeed volatility spikes up . The best strategy of benefitting from decreasing volatility is to sell puts . In this case , the maximum you can make is 100 percent instead of the 500 percent multibagger. A point to note , decreasing volatility may mean that stocks slow down and do nothing at all and that is the time when selling puts make money from the time decay . A more exciting outcome from decreasing volatility is when stock prices move up and buying calls make multi baggers of 500 to 1000 percent . If volatility is increasing , we use 60 percent of the portfolio to buy stocks and 40 percent of the portfolios to sell stocks . . If volatility is decreasing , we use 60 percnet of the portfolio to long stocks and 40 percent of the portfolio to short sell stocks . If we have 3 volatility indexes agreeing with the majority of the patterns , we can become more confident to trade . An example is we get 3 volatility indexes with decreasing patterns and we get more stocks with up patterns than stocks with down patterns .
Back to the old question : What if I do not have 10 million dollars to make this magic bullet ? To be really frank and direct , there is a simpler way to start with just 1 m or even 100 , 000 dollars and I will only make this mini magic bullet for really nice people who believe it can be done .
On the philosophy or running a hedge fund , I think we have to start from the basis of using the right brain to see the whole picture to construct and derisk the portfolio . Build a portfolio interspersed with longs and shorts here . Use the 10 million dollars to build this magic bullet .
Run a quant hedge fund by focusing on PORTFOLIO RISK AND USE THE PORFOLIO TRADING MODEL THAT HAVE UPWARD SLOPING EQUITY LINE . Spend enough resource ( but not all resource ) to pick good stocks and sectors to long and poor stocks and sectors to short .
All the models change every 1 day or 5 days . The Portfolio is like a look forward movie of the market . In reality , it is a synthetic computer brain trained to interact with the market and trained to think ahead of the market by several steps and trained to perfect that skill to keep errors to a minimum . The portfolio then becomes the market itself and will have buys and sells and smart profit targets to take with statistical intelligence and significance .
From its learning history , It already knows how best to maximize its portfolio profits. Even before the trades are even put in , it knows and is already well prepared for the markets .
In Short It has become like Jim Simons .
The END
TECHNICAL REFERENCES
The Following contains visuals explaining the learning technologies we use in predicting Jim Simons .
The following is a Technical Reference of the Background work we undertake when generating these 1881 Financial predciitons for the World .
Revelation 1:18 (King James Version)
18I am he that liveth, and was dead; and, behold, I am alive for evermore, Amen; and have the keys of hell and of death.
This last part explains the work we have done at BrainCapital technologies and the tech and methods we use to make a prediction path for each stock and a visual look forward scenario for each stock . In essence , it is how we think Jim Simons would have done it if he were to play the markets for every stock in the world using maths and science as a quant tool . Our models have mastered life and death .
Working with models and working with numbers I want to explain quite simply and briefly how Quant Models work .
My understanding is that Jim Simons Success lies in making thousands of uncorrelated trades and extracting returns in short time frames of less than a day and perhaps less than a week .
In todays world of very low commissions , I believe that anyone with 10 million in trading capital can actually replicate his technologies with less slippage than is possible say 10 years ago . Even if one does not have the computing power to track thousands of securities , one can actually do it with a handful of instruments .
I also believe that his methods are non parametric , meaning that they do not rely on technical indicators with fixed parameters . Instead he is armed with the power of computers that provide the means to see possible rates of returns before executing a certain model .
Creating new worlds , we can harness todays technologies to do just that ,
Thanks to computers and fast speed executions , today one can see what sort of returns is possible given what the markets has done in the past and used our best effort to model it .
In a nutshell . Using hybrid artificial intelligence technologies , we run billions of computations and do a prediction ranking of all the stocks in our universe . We use the same methodology Google uses in its PageRank Technology by assigning a vote for the most commonly referenced page . Here we assign a U vote for a Up prediction vs a D vote for a Down prediction .
Then we make a Overall Summary Prediction Score to decide if equity markets are generally going up to Heaven or coming down to Hell .All the prediction rankings are laid out in a stock almanac format thus creating an encyclopedia of prediction rankings with the Stock Symbol,Prediction Date and Price Level , the prediction is made from and finally the Prediction Path and Verdict
Model A measures Prediction Ranking of 1st day with 4th day
Model B measures Prediction Ranking of First 3 consecutive days .
Model C measures Prediction Ranking of 2 UP/DOWN pairs for first 5 days .
Inevitably with financial markets , some overlap would occur and we just need to be roughly correct as we know that any Prediction Ranking above 33 level , 33U or 33D is valuable as the probability is higher than 66 percent for the prediction to come true . Choose the highest probability ranking stocks above 33U to go long and the highest probability ranking stocks 33D and above to go short .
For stocks with a neutral prediction ranking use the Overall Summation Prediction Score to determine overall Prediction Score for the whole market and use it as a proxy for stocks with prediction ranking of neutral .
And finally if we lay out all the signals and trade all the signals , we get a straight equity line sloping north and upwards with hit rate of more than 70 percent . and equity returns in excess of 20 percent for each year in the last 21 years using Dow Jones represented by ^DJI and Volatility represented by ^VXO
Understanding our history will help you understand why we decided on this way of trading
History. The history of BrainCapital technologies has its humble beginnings in 1988 . David Lee secured a Singapore Merchant Banking Scholarship which led to stints in Goldman Sachs New York and trips to Chicago Trading Houses . This helped to incubate an idea to develop a machine driven program-trading software for foreign exchange.
David with help from scientists came up with the first version a couple of years later and subsequently in April 1993, made a presentation of the model and findings at the SECOND ANNUAL INTERNATIONAL CONFERENCE ON ARTIFICIAL INTELLIGENCE APPLICATIONS ON WALL STREET. The underlying pattern recognition technology has undergone much refinement ever since.Between 1993 and 1997, the software was used extensively by program traders at Hong Kong Bank, Swiss Bank Corp and BHF Bank.Subsequently , a governmental grant and venture capital group funding by Boston based VC followed in 1998 .Since then , Braincapital technologies has been used by several MNC banks and also a Top 10 program trader who traded 12 percent of stocks on the NYSE. The technologies use state of the art artificial intelligent technologies like neural nets , fuzzy logic and genetic algorithms . Through millions of computational intensive mathematical calculations , the technologies output a 6 step best scenario for each individual stock , bond or currency .Statistically , it can be verified that the technologies has a 65 to 80 percent accuracy rate of predicting price momentum ( speed of trend ) for intraday , daily and weekly time spans. Viceroy International Limited in 2002 completed the 100 percent buy back of BrainCapital technologies .
1987 Introducing DealingMachines For Banks, Hedge Funds and Program Funds. Powered by Hybrid Neural Nets Technologies and Fuzzy logic, It can make a Billion Computations to give you the Best possible price Scenarios. When all agree, you can be sure that it is the best way to trade the market.Used by One of the Top Program Traders in the World and a select list of MNC Foreign Exchange Banks, this Technology is now available for use on the mobile platform for Iphones and Blackberry .
The Rationale for Predicting Price Patterns.
As a start , we have to believe in Jim Simons . We have to believe the world ‘s greatest trader when he says that markets have predictable patterns . Then we can start building and executing our models and start believing that markets can be conquered and mastered .
To develop the perfect Stock Market Machine may be an impossible task but with better technologies and mathematics , we can strive for the next best thing .
Towards this , we develop our serving infrastructure and breakthrough BQT ™ technology to continuously search for price patterns within the worlds Top 1881 Stocks and changed the way stock markets analyses are being conducted.
From the beginning, our developers recognized that providing the fastest and most accurate results required a new kind of rigorous approach that is highly robust and can withstand the most stressful periods of market trading .
To do this , we maximize the use of today ‘s high speed computers and use more than 200 signals in our (patent pending ) BQT ™ algorithm . Patiently , all 1881 Key Stocks of the World are put through our pattern recognition machines and analyzed individually
The importance of each prediction signal generated is then cast as an Independent Vote . And as all the Votes are independently generated and gathered from 1881 stocks worldwide , the Summation of all Signals are collated and considered to have greater value than each individual prediction signal . It is the Summation of All Prediction Signals that then leads us to conclude the future state of Equity Markets World Wide for the next 9 days .
And Thus , we coined the phrase : Heaven Markets for UP Markets and Hell Markets for DOWN Markets . In principle , this methodology is similar to the methodology Google uses in its PageRank Search Algorithm that has made it the world ‘s most successful search engine .
We have always taken a pragmatic approach to help improve pattern recognition search quality and create useful products and our technology uses the collective intelligence of the world ‘s 1881 stocks to determine the future state of equity markets worldwide .
The life span of a Prediction Signal may take less than half a second but it involves a million calculations drawing multiple variables from momentum , stochastic , relative strength , time window space and trend .
This kind of detailed , high speed computation and accuracy is only made possible by Today ‘s advances In Technologies and Mathematics.
.Testimonial from a Hedge Fund Manager .
In a world where secrets are kept , I am grateful to David Lau who has wrote the following about my firm and me .
“ FANTASTIC !
…If there ever is an Oriental Alchemist of Finance , David Lee certainly qualifies as one . His Volatility Models are believed to be more than 70 percent accurate , I personally found them to be even pin point accurate and hugely profitable .
In the last few years , when many models fail , Braincap Volatility Models held up spectacularly well .In Sept 4 , a long call in Hang Seng Index till September 11 2009 was worth more than a 1000 points .
His 2 Black Swan Events highlighted in the Training Seminar book in July and August 2009 did spectacularly well . It turned 10c to 2 dollars within days .
His Basic Models have been well researched and supported in many scientific journals , namely when people buy , they do slowly as greed slowly creeps in . But when they do sell , they do in great Fear and HUGE volatility .
David Lee 's Contribution to the Financial World is to use Maths to detect spikes in Volatility as sell Signals and slow drops in Volatility as Buy signals . He found a way to quantify these signals and lay them over a 21 year track record to show a upward sloping equity line .
For that , I salute him . “
… Product and Book Review by David LCH , CEO , Hedge Fund Manager
Forbidden Fruits in the Garden of Eden
By Anonymous Artist
The Forbidden Fruits of Finance :
1881 Financial Predictions for The Entire World
The predictions cover stocks from Asia , Malaysia, Jakarta, South Korea , Taiwan , Latin Americas , Mexico, Brazil , Canada Toronto, China Shanghai, India NSE , Hong Kong , Australia and including 800 US Listed ETFS , ^NDX 100 and S&P500 Index stocks , the Most Important Stocks in the world .
The S&P 500 Index represents 500 of the largest companies designed to give a big picture view of the US stock market. About $1.5 trillion in investments mirror the moves of the S&P index and 4.9 trillion in investments are measured against it .
True Secrets of Predictions .
Quantifiable over 20 years of Market History .