A Canadian on Wall Street

I’m reading The Predictors, after wolfing down The Eudaemonic Pie, Thomas Bass’s earlier work on Doyne Farmer and Norman Packard’s excursions into money-making schemes. The latter is his earlier book about the pair’s scheme at winning roulette, which entailed using physical models and shoe computers to improve the odds of winning, while the former is about the apparently successful use of their chaos theory work to make money in the financial markets. Both books are pretty breezy reading, although if you know a little about either field Bass does a pretty good layman’s job of touching all the bases. He even makes mention of the Mandelbrotian usage of fractals and the fat tail stuff that folks like NN Taleb love, which I wasn’t expecting. There are some choice disses of technical analysis, likening chartists to astrologists and entrail-readers, and a quote from Farmer referring to that time as like the Middle Ages, with said “astrologists” co-existing with the patrician, institutionalized view, akin to the old establishment viewing the world as flat, who hold strong to efficient market theory. I’ll have to quote some of it when I get the time.

Not that long ago, I investigated getting a degree in financial mathematics, even though as a Vancouver-based investor, I’m nowhere near the major equity and option markets of New York, London and Chicago. Browsing the list of hedge fund jobs, I had daydreams of joining one of these firms, living some fast-paced life with long hours and big money. However, with my computer science and physics background coupled with my abhorrence of the MBA and wealth management programs offered (which seemed more about salesmanship than skillful investment), it seemed like financial mathematics would be more up my alley. After auditing a few courses at SFU in Risk Management, I realized ultimately that the MFin and MA in Risk Management programs, as Emanuel Derman points out in his book My Life as a Quant, are chockful of new immigrants and foreign-born students with educations emphasizing mathematics. In fact, the more glamorous jobs of portfolio manager were often plucked not from the ranks of the risk managers (the actuaries of finance) but from those same MBAs and wealth management programs I didn’t find appealing, the ability to gladhand and socialize often paramount — like most things in life. The few exceptions to this hierarchy include the “quant hedge fund” epitomized by Renaissance Technologies, whose founder, the ex-SUNY Stony Brook professor Jim Simons, has quite vocally derided the poor math skills of North American students. He tends to hire foreigners, instead.

In the end, I decided I didn’t really like any of those options, and so, in my haphazard way, continue to work towards some vaguely stated goal of being an independent investor, like the folks at Contra the Heard. One of the founders of Contra is a software designer, which I find unsurprising, somehow. Why are so many people in the software industry drawn to the markets? Is it a belief in trading systems and algorithmic methodologies that is most easily tested against the markets, with the various APIs and tracked statistics available making it probably one of the most comprehensive and consistently updated data sets available? The ex-physics majors often prefer the options and bond markets, with more quantitative factors that can be used to create mathematical models; physicists are much more numerate than the average computer science person and they take solace from that fact, thinking that it gives them an edge. (They may be right.)

In my earlier investigations, I had looked around to see if there were hedge funds in Vancouver; the majority of Canadian hedge funds are obviously situated near Bay Street. There are a few here, like Asset Logics, KCS Funds and BluMont Capital (not strictly based here, but likely their resource arm is). That first fund lists Ian St. Martin as a manager, one of the successful investors at Marketocracy, his Optimal Risk Reward fund increasing its NAV about 7 times since May 2001 (convenient, no? It’s an excellent return, but top-performing funds that were started after September 11th haven’t been around long enough to determine long term performance, in my opinion). His bio reads: “After a successful career in software consulting, research, and development, Mr. St. Martin has turned his analytical eye to the US equity markets, spending the last five years developing a system-based approach to trading.” Is it the analysis aspect of software design that crosses over with market analysis? The hodge-podge of business requirements and more technically-minded introspection required when creating software probably maps quite nicely to investing in equities. I come from a software background, career-wise, and I know that my own personality is well-suited to design and analysis; many of the other people I’ve worked with have taken an inordinate interest in investing, too. Just something to think about, I guess.