investing

Machine learning can be used in investing in a variety of ways. This article seeks to show a few of those and describe the basics. Hedge funds have tried for years to use machine learning (or AI) in their funds. Moving on to today, all quantitative funds use some form of machine learning. Some hedge funds even build around machine learning specifically, spurning human intervention. Risk Management Risk...

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Prominent asset manager Mary Meeker once said her primary goal is limiting drawdowns! While most portfolio construction is explicitly or implicitly focused on returns, she knew that minimizing events that can decimate the portfolio is more important for long term gains than trying to maximize growth periods. Famously, a portfolio needs to double to make up for a 50% drawdown. So how to minimize drawdowns? Portfolio diversification...

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The first time I heard the term ‘Artificial Intelligence’ was in the 1980s, when my dad worked for Digital Equipment Corporation, in the Silicon Valley of the East (Massachusetts). And yes they made computer chips from Silicon. In the 80’s Artificial Intelligence referred to, basically, complex logical structures, with each decision leading to a tree of subsequent possibilities. It’s all compute power allowed in the...

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Recently I saw an article about Monte Carlo Analysis, which (as you know) is a way to evaluate a person’s ability to meet their future income needs. Using a portfolio of securities or asset allocations it runs through as many rolling periods as available in the data, to come up with a probability of meeting future income needs. Certainly Monte Carlo Analysis is not great with...

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It's commonly known in the industry that passive investing keeps growing and active investing is under pressure from all sides. First there are fees. For a decade or more, books have been written about the impact of fees on portfolios. The late John Bogle was one of the pioneers and thought leaders here. Second, performance reports showing passive funds beating active managers hit the investment...

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You may have heard of Markowitz’s Critical Line Algorithm, or CLA. CLA was Markowitz’s attempt to solve the problem of portfolio optimization using quadratic math. For a couple reasons is was an ingenious invention. But it also has its problems. The problem with CLA is that it demonstrates large changes in the portfolio with small changes in the forecasted returns of assets. This is a big problem...

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