You hear that often, but if you squint your eyes, the entire idea of index funds is just that: they outperformed stock-pickers in the past, so you should put money into them to get higher returns in the future. There's no fundamental index fund investment thesis other than "past performance is indicative of future returns".
That thesis is at least to some extent self-fulfilling, because there's so much money flowing into index funds that prices of all the underlying assets keep moving up, and there's probably not enough money trying to bid against that / arbitrage the excesses away.
A similar thing could happen with AI. Markets are efficient only if the world isn't in some sort of a trance.
> you should put money into them to get higher returns in the future.
Higher returns than what? I thought the whole point of buying broad market index funds was to simply get the market returns. For this thesis to make sense, you simply must assume that companies, in aggregate, make money - not that any particular company will follow past performance. If you don't think companies make money, then what are you doing buying equities?
I don't think that's a particularly accurate assessment of the idea behind index funds.
The point of index funds isn't "these outperform all pickers, so they'll outperform all pickers in the future."
I think the idea is more around a combination of:
- you'll have much lower risk trying not to pick the right picker (or pick the investments yourself)
- the median picker is probably not very good (approached in two directions: sizable pickers that hit on an edge will likely be copied until the edge is gone, and smaller pickers are extremely unlikely to have enough specialized info or skills to excel).
That's not the idea behind index funds. It's arithmetic. The aggregate return of active investors, before fees, is the market return. Once you subtract fees, it's below the market return. While some active managers' performance less fees is higher than the market return, it's very difficult to predict which will perform this way. So your best bet is to own the market through a broad index fund that has almost no cost.
If you want to read about this, see Sharpe (1991), The Arithmetic of Active Management.
In a spherical cow sense sure. But no one is buying the market return when they buy even a total market index fund. Other commenter is right, they are expecting past performance of these index funds to be indicative of future returns. But then again they aren't really actively investing either. Automatic contributions pervert a lot of the efficient market hypothesis ideas I think since these people are buying, routinely, maybe as long as they are alive, with no information in front of them.
> So your best bet is to own the market through a broad index fund that has almost no cost.
There's also the fact that index funds have de facto become pension funds in most of the Western world, so Western politicians are trying to do their damn best to keep the stock exchanges afloat (i.e. always going up) in order to keep those aged 45-50 and older on their side when it comes to voting. We've last had a market crash in 2008-2009 (the covid thing was just a blip), I don't see today's politicians allowing a crash like that to happen if they can help it.
So in fact putting one's money into index funds is betting on the current political system continuing doing its thing, no need to involve any advanced maths.
> There's no fundamental index fund investment thesis other than "past performance is indicative of future returns".
(Not a finance guy) But isn’t it that buy and hold index funds minimise trading fees, and those savings compound to produce better long term performance than nearly all active funds?
(The “Acquired” podcast episode covering the history of Vanguard and Jack Bogle goes into it in detail)
No, the investment thesis is that there is a risk premia associated with investing in equity (as opposed to cash) that you will be compensated for - if this risk premia exists the way to harvest it is to be as diversified as possible (hand waving).
The relative performance of different baskets of equity is of course much more subtle / prone to behavioural effects and so on.
Might not work for long holds but for short daytrading I feel like getting enough data for a model, not llm but any model, is the real golden goose moat of most ibs. Pajama traders at home have to set up heuristics for what they believe is a bull flag and maybe develop even a refined gut sense of spotting say a bull flag.
But imagine a quant at Jane street. They see the same candlestick pattern as the pajama guy but their model is giving them actual odds ratios instead of gut instinct. They can now score their putative bull flags in real time and make investments that might be more likely to pay off than not.
A big reason why this works is that technical analysis is a self fulfilling prophecy. Many people are looking for and trading on the exact same signals and this is enough to see a pattern in the candlestick data actually be one associated with market movement. Whether the market movement is 'genuine' or manufactured by other quantitative technical traders in this self fulfilling prophecy doesn't matter, you've made your money and really don't care about the underlying asset at the end of the day, only its delta.
WIthin markets the idea "it implies correlation" may be enough to shift your odds from 50/50 to 60/40, which is enough that people with "implying only" are usually fine to dare to enter a position.
The market has modes and reverts behavior when it switches them. Thus happy bouncy becomes hammered stammered. The prediction models fall hook and sinker for that.
There is no model of the market that can remain stably accurate because the market will inevitably incorporate the insights of any model that is accurate until those insights are no longer accurate
Damn, imagine you're the tribe's only successful hunter. You're the only person that's ever brought a deer back to the fire. You're even really good at it.
But the deer...sometimes they just don't exist. And you checked very carefully. No prints, no rubbings, no hair, no trail. Nothing whatsoever. You even left a bit of hair under a rock one time and the next time you checked it was gone. The only evidence of the existence of deer is the pelt you wear and the memory of last night's dinner. Something happens to the deer in the woods.
Some weeks, you bring back a deer a day. The tribe sings song in your honor. But every time this happens, there are those who grow quite suspicious when you all of a sudden "haven't seen a deer in weeks" because what do you mean you haven't seen a deer you said there were hundreds of them yesterday.
You can try to bring them with you to see, but most aren't interested. The few you bring happen to come when the deer are plenty. You can't convince them to come when the deer have gone because they just went yesterday and saw the foot-print highways and scarred trees; they know trees don't heal overnight.
in order for your model to accomplish that, you would get very rich.
there will also likely always be more. in the limit in order to get an edge your model would start to infer insider information. for example, it's common knowledge by now that satellite imagery is used to measure car numbers in parking lots, that's a proxy for insider information.
so it's not even so much the model as it is the data.
even being able to forecast weather better than publicly available methods can be leveraged to gain a significant edge.
Just having a model that's predictably biased the wrong way when other models have already priced in the same things is pretty good. I mean, you have to look at where your model has no edge and figure out if it does have edges that the other ones are missing.
Coming at this from baseball, where the art is really knowing when not to take a game based on the line; usually if what you predict lines up too closely with Vegas, your edge is gone. (Hand-written A-life/evolutionary algorithm model of competing baseball equations that I've been refining for years, picks lately filtered through AI to isolate which ones fall into bands that are worth risking money on).
Also known as the trading model's shelf-life. Based on what I have heard and learned, the average active trading model has a useful life of around 18 months. After that the rest of the market has adjusted and its edge is gone.
If rumours are to be believed, several "slow" hedge funds have models that remain useful and profitable for 5 years or more. Then again, those models are not used to conduct exchange trades but rely more on aspects of fundamental analysis.
Rather curiously some of the largest banks and tech-heavy asset managers tend to sponsor meetups and events like PyData - every now and then doing a slot on some of their open-sourced stuff. You might see a talk on 5-year-old trading model internals with large chunks of it opened up, or they could present some of the internal UI or visualisation libraries. The latter tend to be things that they no longer actively develop (they're "ready") but maintain for their ongoing persistent needs.
Of course anything that actually brings them money and/or gives an edge is not even discussed.
Honestly: People think that "trading models" (whatever this should be) needs to be somewhat "supersophisticated" and "extreme driven by whatever complex math" - the brutal truth, esp. for smaller trading shops is much more simpler:
- Standard approaches like trend following or mean reversion are working very well since decades. (I can speak only for the last ~25 years)
Complexity in trading is not about "building that one specific niche-super-strategy", but more about putting all the ideas in a reproduceable approach/process to repeat it over and over again to grow the money.
The real story here is this wonderful exposition in applying diffusion models to a time series data that is neither discrete nor continuous. It’s always fascinating to see diffusion models applied in different scenarios, same with diffusion language models.
Maybe other people did, they just chose to talk about something slightly off topic.
There is nothing in the community guidelines about having to stay on topic and to only talk about what's on the article.
There is however:
Please respond to the strongest plausible interpretation of what someone says, not a weaker one that's easier to criticize. Assume good faith.
Please don't comment on whether someone read an article. "Did you even read the article? It mentions that" can be shortened to "The article mentions that".
What I liked about it is that they played around with different categories so as to tackle the natural discontinuity of how markets work/happen. With different categories the applicable models and data conditioning change.
I think the requirement of manual tuning of the data and categories is touching bitter lesson aspects: a more general model would train and find the categories in its latent space.
I think the pattern In these posts is that they are looking for models that are explainable and have the potential for low latency, like the kann fpga project. While more general and opaque classifiers possibly work they are unlikely to work at the speed and risk constraint required to make money.
I apologise if I completely missed the point, it is not my field at all.
I don’t understand how anyone can say market data is continuous. It’s an aggregate of discrete orders and transactions. It may look continuous if you squint, but it’s not.
The article mentioned this at the beginning and end:
"But what kind of data is market data? ... is it continuous or discrete? Market data seems to have features of both. An order book evolves via a series of turns as market participants put on, or take away, resting orders; there is no doubt a discrete action space. And yet, many of the most important parameters of a given order, like its price, have such a high cardinality that they basically appear continuous. ...
One way to explore these complications is to treat your data as if it’s continuous and see how that breaks down. "
"Most of the project was spent grappling with a fundamental problem: market data is neither fully continuous nor fully discrete."
I think it is continuous because it is an emergent property of the market system. There is a video where the guy tried to see if market structure was "real" by modeling it. He had trouble in the beginning but when he added an order book the structures and patterns (Head and Shoulder, Bull Flags, Double Tops) appeared. It's called:
"I made a Market Simulation to see if Patterns are Real" by Krafer
Remarkable internship. Fairly dense write-up too. Everything is informative.
Amusing degree of detail, though it makes sense it’s targeted at future interns. Why would you expect order inter-arrival to be normal? Surely an order arriving sort of boosts the probability of others, Hawkes-like. A nice little trick to get students talking I suppose.
This was really interesting and a lot to get done in a short internship, nevermind the public retrospective and hackernews appearance. Well done Kavish!
For more info on why flow-matching is more stable than DDIM, see Heitz 2023, which nicely explains how they're almost equivalent but DDIM corresponds to a differential equation with a 1/α term that diverges at the start of the denoising process, while flow-matching/IADB doesn't diverge: https://arxiv.org/abs/2305.03486
> There were some technical findings along the way—for example, Kavish found that DDPM, while theoretically ideal for denoising in diffusion models, diverged, and that flow matching performed much better.
When they say "theoretically ideal" they mean a specific thing: the DDPM loss is information theoretically the number of error correction bits needed to recover an image. At very low noises, this quantity goes singular. This is not actually a problem—you should bound the log-SNR of your schedule by the image quantization level (usually 9 bits) anyway, and a trained bound lands within 10% of this.
Flow matching does not diverge because it removes the log-SNR rate from the loss. Since the rate can span several orders of magnitude over your schedule, you should importance sample during training. My guess is Kavish forgot to do this, leading to divergence.
There is a great line in the Man Who Solved The Market [0] about RenTech:
Paraphrasing:
"They went out of their way to try and fill in gaps in the historical market data. Over time, they got so good at predicting prices movements that they built algorithms to fill in the gaps."
Highly recommend the book if you are interested in the history of algorithmic trading.
Loved that book! Makes me wonder .. with how good AI is getting at solving novel math problems .. could you essentially bruteforce ur way towards some of RenTech’s techniques? Like .. have AI go through research papers (and related work) published by RenTech staff, figure out how their respective fields of expertise could be applied to trading, and run experiments/backtests to see what sticks? or is the hard part less the math and more the data and execution?
I have done a lot of research on RenTech. AFAIK, their early stuff isn't that much of a secret. Lots of Markov modeling and NLP-related stuff... but ultimately I believe it just came down to being one of the few firms actually even attempting statistical modeling with market data. (You had Ed Thorp too!)
You can easily find the backgrounds of people that were hired/worked there. Also, some amount of leakage over the years, bits and pieces, little clues... Deriving an approximation of "this was their strategy" with any amount of precision would almost be impossible. There is probably only a handful of people in the world who could tell you if you're hot or cold.
Very interesting thought experiment though...
> the hard part less the math and more the data and execution?
Ironically, this _was_ the part they had some trouble getting right. Programming was not nearly as ubiquitous back then.
For images, latent diffusion only works when using a special decoder that can produce realistic images given relevant samples from the latent space. This is trained like a GAN and doesn’t focus on pixel level error but higher level image features extracted via another network etc. expect that building a decoder like that for their problem may have solved their issues.
Plans don't determine outcome though, only broad sector movements eg announcing you are doing AI tend to produce a small spike in price, effect is slowly diminishing though.
Not a money guy, but isn't measuring accuracy of a price model via least squares misguided?
A model that predicts the market with 99% accuracy (1% LS error), but reacts to price changes in a delayed manner is not very valuable, while the same model that is early is basically a money printer.
TheOtherHobbes | 20 hours ago
socializer | 19 hours ago
That thesis is at least to some extent self-fulfilling, because there's so much money flowing into index funds that prices of all the underlying assets keep moving up, and there's probably not enough money trying to bid against that / arbitrage the excesses away.
A similar thing could happen with AI. Markets are efficient only if the world isn't in some sort of a trance.
Leif24 | 18 hours ago
Higher returns than what? I thought the whole point of buying broad market index funds was to simply get the market returns. For this thesis to make sense, you simply must assume that companies, in aggregate, make money - not that any particular company will follow past performance. If you don't think companies make money, then what are you doing buying equities?
majormajor | 18 hours ago
The point of index funds isn't "these outperform all pickers, so they'll outperform all pickers in the future."
I think the idea is more around a combination of:
- you'll have much lower risk trying not to pick the right picker (or pick the investments yourself)
- the median picker is probably not very good (approached in two directions: sizable pickers that hit on an edge will likely be copied until the edge is gone, and smaller pickers are extremely unlikely to have enough specialized info or skills to excel).
pottertheotter | 18 hours ago
If you want to read about this, see Sharpe (1991), The Arithmetic of Active Management.
asdff | 18 hours ago
kefabean | 13 hours ago
loglog | 11 hours ago
KellyCriterion | 3 hours ago
And its not that discussed,as Id say: What happens if the number of people interested in buying ETF are shrinking in numbers?
For sure, the liquidity will stay out there - somewhere, somehow. But what impact on stock/index prices?
Boomers now retiring, in most western countries this is the biggest cohort of all time - what happens if they want cash for stocks?
paganel | 16 hours ago
There's also the fact that index funds have de facto become pension funds in most of the Western world, so Western politicians are trying to do their damn best to keep the stock exchanges afloat (i.e. always going up) in order to keep those aged 45-50 and older on their side when it comes to voting. We've last had a market crash in 2008-2009 (the covid thing was just a blip), I don't see today's politicians allowing a crash like that to happen if they can help it.
So in fact putting one's money into index funds is betting on the current political system continuing doing its thing, no need to involve any advanced maths.
naveen99 | 12 hours ago
mhh__ | 10 hours ago
implements | 11 hours ago
(Not a finance guy) But isn’t it that buy and hold index funds minimise trading fees, and those savings compound to produce better long term performance than nearly all active funds?
(The “Acquired” podcast episode covering the history of Vanguard and Jack Bogle goes into it in detail)
mhh__ | 10 hours ago
The relative performance of different baskets of equity is of course much more subtle / prone to behavioural effects and so on.
asdff | 18 hours ago
But imagine a quant at Jane street. They see the same candlestick pattern as the pajama guy but their model is giving them actual odds ratios instead of gut instinct. They can now score their putative bull flags in real time and make investments that might be more likely to pay off than not.
A big reason why this works is that technical analysis is a self fulfilling prophecy. Many people are looking for and trading on the exact same signals and this is enough to see a pattern in the candlestick data actually be one associated with market movement. Whether the market movement is 'genuine' or manufactured by other quantitative technical traders in this self fulfilling prophecy doesn't matter, you've made your money and really don't care about the underlying asset at the end of the day, only its delta.
devin | 17 hours ago
asdff | 17 hours ago
devin | 5 hours ago
IshKebab | 10 hours ago
Same as "correlation doesn't imply causation" - it actually does imply it, it just doesn't prove it.
KellyCriterion | 3 hours ago
reedf1 | 19 hours ago
aamargulies | 18 hours ago
dzink | 19 hours ago
stult | 19 hours ago
tylerflick | 19 hours ago
zdc1 | 18 hours ago
There's definitely alpha out there, but I wouldn't want to make it my job to look for it
goodmythical | 4 hours ago
But the deer...sometimes they just don't exist. And you checked very carefully. No prints, no rubbings, no hair, no trail. Nothing whatsoever. You even left a bit of hair under a rock one time and the next time you checked it was gone. The only evidence of the existence of deer is the pelt you wear and the memory of last night's dinner. Something happens to the deer in the woods.
Some weeks, you bring back a deer a day. The tribe sings song in your honor. But every time this happens, there are those who grow quite suspicious when you all of a sudden "haven't seen a deer in weeks" because what do you mean you haven't seen a deer you said there were hundreds of them yesterday.
You can try to bring them with you to see, but most aren't interested. The few you bring happen to come when the deer are plenty. You can't convince them to come when the deer have gone because they just went yesterday and saw the foot-print highways and scarred trees; they know trees don't heal overnight.
teravor | 18 hours ago
there will also likely always be more. in the limit in order to get an edge your model would start to infer insider information. for example, it's common knowledge by now that satellite imagery is used to measure car numbers in parking lots, that's a proxy for insider information.
so it's not even so much the model as it is the data.
even being able to forecast weather better than publicly available methods can be leveraged to gain a significant edge.
KellyCriterion | 3 hours ago
Niche information pieces like this are only relevant to a veeeery small subset of all market participants, nearly invisible.
majormajor | 18 hours ago
noduerme | 11 hours ago
Coming at this from baseball, where the art is really knowing when not to take a game based on the line; usually if what you predict lines up too closely with Vegas, your edge is gone. (Hand-written A-life/evolutionary algorithm model of competing baseball equations that I've been refining for years, picks lately filtered through AI to isolate which ones fall into bands that are worth risking money on).
bostik | 9 hours ago
If rumours are to be believed, several "slow" hedge funds have models that remain useful and profitable for 5 years or more. Then again, those models are not used to conduct exchange trades but rely more on aspects of fundamental analysis.
Rather curiously some of the largest banks and tech-heavy asset managers tend to sponsor meetups and events like PyData - every now and then doing a slot on some of their open-sourced stuff. You might see a talk on 5-year-old trading model internals with large chunks of it opened up, or they could present some of the internal UI or visualisation libraries. The latter tend to be things that they no longer actively develop (they're "ready") but maintain for their ongoing persistent needs.
Of course anything that actually brings them money and/or gives an edge is not even discussed.
HWR_14 | 5 hours ago
KellyCriterion | 3 hours ago
Honestly: People think that "trading models" (whatever this should be) needs to be somewhat "supersophisticated" and "extreme driven by whatever complex math" - the brutal truth, esp. for smaller trading shops is much more simpler:
- Standard approaches like trend following or mean reversion are working very well since decades. (I can speak only for the last ~25 years)
Complexity in trading is not about "building that one specific niche-super-strategy", but more about putting all the ideas in a reproduceable approach/process to repeat it over and over again to grow the money.
armcat | 19 hours ago
pottertheotter | 18 hours ago
devin | 17 hours ago
slekker | 15 hours ago
gchamonlive | 10 hours ago
There is nothing in the community guidelines about having to stay on topic and to only talk about what's on the article.
There is however:
https://news.ycombinator.com/newsguidelines.htmlptsneves | 9 hours ago
I think the pattern In these posts is that they are looking for models that are explainable and have the potential for low latency, like the kann fpga project. While more general and opaque classifiers possibly work they are unlikely to work at the speed and risk constraint required to make money.
I apologise if I completely missed the point, it is not my field at all.
hammock | 2 hours ago
(Yes I read the article)
Ixander | 47 minutes ago
"But what kind of data is market data? ... is it continuous or discrete? Market data seems to have features of both. An order book evolves via a series of turns as market participants put on, or take away, resting orders; there is no doubt a discrete action space. And yet, many of the most important parameters of a given order, like its price, have such a high cardinality that they basically appear continuous. ...
One way to explore these complications is to treat your data as if it’s continuous and see how that breaks down. "
"Most of the project was spent grappling with a fundamental problem: market data is neither fully continuous nor fully discrete."
I think it is continuous because it is an emergent property of the market system. There is a video where the guy tried to see if market structure was "real" by modeling it. He had trouble in the beginning but when he added an order book the structures and patterns (Head and Shoulder, Bull Flags, Double Tops) appeared. It's called:
"I made a Market Simulation to see if Patterns are Real" by Krafer
https://www.youtube.com/watch?v=oWheof70O9g
arjie | 16 hours ago
Amusing degree of detail, though it makes sense it’s targeted at future interns. Why would you expect order inter-arrival to be normal? Surely an order arriving sort of boosts the probability of others, Hawkes-like. A nice little trick to get students talking I suppose.
Jane Street interns impressive as always.
dintech | 13 hours ago
stratos123 | 11 hours ago
programjames | 10 hours ago
> There were some technical findings along the way—for example, Kavish found that DDPM, while theoretically ideal for denoising in diffusion models, diverged, and that flow matching performed much better.
When they say "theoretically ideal" they mean a specific thing: the DDPM loss is information theoretically the number of error correction bits needed to recover an image. At very low noises, this quantity goes singular. This is not actually a problem—you should bound the log-SNR of your schedule by the image quantization level (usually 9 bits) anyway, and a trained bound lands within 10% of this.
Flow matching does not diverge because it removes the log-SNR rate from the loss. Since the rate can span several orders of magnitude over your schedule, you should importance sample during training. My guess is Kavish forgot to do this, leading to divergence.
alexpotato | 10 hours ago
Paraphrasing:
"They went out of their way to try and fill in gaps in the historical market data. Over time, they got so good at predicting prices movements that they built algorithms to fill in the gaps."
Highly recommend the book if you are interested in the history of algorithmic trading.
0 - https://amzn.to/4jNFpOS
0 -
zshn | 10 hours ago
gyanchawdhary | 7 hours ago
robswc | 5 hours ago
You can easily find the backgrounds of people that were hired/worked there. Also, some amount of leakage over the years, bits and pieces, little clues... Deriving an approximation of "this was their strategy" with any amount of precision would almost be impossible. There is probably only a handful of people in the world who could tell you if you're hot or cold.
Very interesting thought experiment though...
> the hard part less the math and more the data and execution?
Ironically, this _was_ the part they had some trouble getting right. Programming was not nearly as ubiquitous back then.
efavdb | 8 hours ago
asanineassasin | 4 hours ago
avereveard | 4 hours ago
Onavo | 4 hours ago
torginus | an hour ago
A model that predicts the market with 99% accuracy (1% LS error), but reacts to price changes in a delayed manner is not very valuable, while the same model that is early is basically a money printer.