Saturday, December 30, 2006

Mathematical Hedge Funds

" Without question, quantitative trading approaches - carrying names such as "black box trading," "algorithmic trading" and "statistical arbitrage" - are all the rage. Lumped in with these mysterious-sounding approaches are high-IQ terms like "pattern matching," "genetic algorithms" and "neural networks." At the essence of these strategies are two distinct features: (1) humans aren't involved in the decision-making process; and (2) models are designed to either "learn" like humans or to detect non-intuitive relationships among a sea of data that can't be readily seen by humans."

My rich friend asked me if I wanted to form a hedge fund with him -- I think this was the kind of strategy he had in mind. unfortunately, i'm not ready for prime-time with statistical arbitrage, and ultimately I agree with the crux of this piece which is that the gains from computer-driven arbitrage will likely be fleeting.

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