The New Kings of Wall Street

Much like death and taxes, a cold and rainy September afternoon in Ithaca, NY is a certainty of life. Seeking refuge from the torrential downpour, students all across campus scrambled back to their respective homes. Yet, inside of the newly-opened eHub workspace in Kennedy Hall, just off Tower Road, a gathering of undergraduate and graduate students chatted, settling in and preparing to learn more about one of the hottest topics on campus: algorithmic trading.

 

Sparkstone Analytics Executive Director Ryan Kishore, alongside his fellow co-founder, Analytics Director Rishab Gupta, was giving a presentation to a sizeable group of students on how to develop their own algorithmic trading strategy. This presentation was part of their bi-annual Sparkstone Trading Challenge, a competition where participants are given access to the Sparkstone database and tasked with developing their own trading strategy over the course of a month. The competition, much like Sparkstone, is a new addition to the already large financial presence on Cornell’s campus. Last semester, over 100 students partook in the competition, seeking prizes including dinner with employees at Optiver, a high frequency trading firm that has experienced growing success over the past few years.

 

“As the first major organization on campus to embrace quantitative finance and consolidate interested people, we are thrilled as we serve this growing curiosity," says Kishore when asked about the growing presence of quantitative trading on the Cornell campus. “We also notice that not too many people understand that quantitative finance has a large range of roles that can exist within the field. I am looking forward to students discovering what the spectrum looks like, whether it is algorithm design, factor modeling, or even low latency hardware design.”

 

Sparkstone Analytics is a small group of students that represents the growing interest in quantitative trading sweeping the campus and, more broadly, the finance industry. Over the past few years, numerous clubs and projects have sprung up across campus to satiate demand among students seeking to learn more about automated trading. What explains the billions of dollars institutional investors have moved to this new technology-driven form of investment?

Quant funds allocate investor capital to securities relying heavily on advanced quantitative analysis. The strategies employed by the fund managers rely on heavy mathematical and computer-generated algorithmic models built on data gathered from the past several decades. Many of the traders employed by these firms come from traditional STEM-heavy backgrounds, with some holding doctorates in mathematics and physics and others having strong engineering backgrounds. Take Two Sigma, for example: in their Manhattan office they employ nearly 800 researchers. Roughly 130 of them holding doctorates, and 6 are former Math Olympiad winners. These funds’ consistent performance derives from using its algorithms and mathematical models to sift through mammoth amounts of data, attempting to find relationships and trends that a regular fund manager may not. They don’t trade based on “gut feelings” but rather precise reasoning.

 

It only takes a brief look at the performance of actively-managed hedge funds over the past several years to see what causes the mass exodus of investors from their firms. Since 2009, actively-managed funds have been up roughly 3 percent, posting returns lower than those of the S&P 500 and equity dividends of the index during that time. According to Bloomberg, hedge funds in 2016 delivered returns of 1.2 percent, well below the S&P 500’s 7.6 percent return. These funds saw a resounding $25.2 billion withdrawn last July alone, facing a $55.9 to $106 billion outflow in 2016 overall as investors sought out larger returns.

 

Much of the frustration that has catalyzed the demise of hedge funds has come from the traditional “2 and 20” fee. 2 percent of the value of the fund is paid to the manager, regardless of whether it performs well, with an additional 20 percent pocketed from any profits the fund earns. When these firms posted gargantuan returns, investors could easily turn a blind eye. But lately, funds’ poor performance has caused investors to lash out against managers. Renowned investor Warren Buffett has even voiced his concern about the absurd fees in an interview with CNBC, saying that “two and twenty… borders on obscene.” A few of the most notorious hedge fund managers like Bill Ackman and Paul Tudor Jones have had to answer for the lackluster performance of their funds over the past few years. They have since begun cutting their fees and reevaluating their investment strategies in hopes of stopping the financial bleeding.

 

While active funds spent much of the past year dealing with investor backlash and poor performances, quant funds flourished. Over the past several years, roughly $7.9 billion has poured into funds that employ consistently-performing quantitative strategies, pushing the total amount of assets under management for quant funds up to $908 billion. According to Forbes, quant funds hauled in $113 billion over the past several years, making up 25 percent of total net gains brought in by the top 20 hedge funds over the course of their existence. Firms like Two Sigma, Renaissance Technologies, D.E. Shaw, and PDT Technologies have all enjoyed robust returns. Renaissance’s Equity Fund rose 4.6 percent last June, 3.8 percent higher than hedge funds globally. Two Sigma’s fund rose 12.6 percent through last year, versus 2.2 percent for hedge funds across the board according to Bloomberg. D.E. Shaw, considered one of the pioneers of quantitative finance, has consistent double-digit returns net of fees over the past several years. Some quant fund managers have achieved near celebrity status; top Wall Street investors have forked up to $1000 just to spend an evening with the “quant fund master”, Peter Mueller, of PDT Partners. His fund has seen annualized returns of roughly 18.5 percent since its inception.

 

While quant funds already outperform their competitors, some investors believe they have a long way to go before being widely trusted. Big name quant funds such as Systematica saw losses of $3.8 billion, or a resounding 11 percent drop in their flagship fund, while Cantab Capital saw its main quant fund drop nearly 8 percent. BlackRock recently reported that its quantitative hedge fund strategies suffered losses for 2016. Much of the industry’s hesitation towards quant funds stems from the great quant meltdown of 2007. In August 2007, quantitative hedge funds across the board faced monumental losses seemingly out of the blue. As one fund began to unwind, others followed quickly behind resulting in a massive sell-off by numerous quant funds. The surprise crash still lacks a suitable explanation, leading some to fear similar implosions will happen again and feeding into concerns about placing money in the hands of computers.

 

Despite their past inconsistencies, the beauty of quant funds lies in their capacity for evolution. They constantly develop new strategies, each one more sophisticated and utilizing more data than the previous, in hopes of generating larger, more consistent returns. Sparkstone’s Kishore believes that the superiority of human investors is beginning to decay: “This is a critical question with implications for anyone considering work in the finance industry. Ultimately, alpha generated by humans will diminish as computational techniques improve and thought processes are systematized,” he says in an interview. It seems that more and more actively-traded hedge funds are beginning to adopt quantitative strategies to bring back investors. Paul Tudor Jones, who was a key investor in the opening Two Sigma Partners in 2001, has laid off 15 percent of the workforce at his Tudor Investment Corp. and is working towards implementing quant-driven strategies in order to post higher returns. The rest of Wall Street is also following this trend, hiring some of the top talent from Silicon Valley in hopes of making their firms more competitive and appealing to investors.

 

While the past few years have seen humans take the backseat in many industries, finance may be the only frontier in which computers will never gain total control. Hedge fund managers, despite the absurd fees, are able to command so much by harnessing their ability to see things that a computer-generated algorithm may not, honing in on potentially lucrative investments. “Yet, we will not see a complete overtaking as there are certain roles and pattern recognition abilities that humans will continue to excel in the foreseeable future," Kishore says. Hedge fund managers can still sift through current events and make the appropriate trades to ensure his investors are protected. But hedge fund managers should not take too much comfort in their edge. Quantitative hedge funds are beginning to implement better artificial intelligence into their strategies, allowing them to seek out patterns that could not be detected with a mathematical formula. Take traders at BlackRock, who use satellite images of China’s largest cities to draw conclusions on China’s real estate industry. There has become a much greater emphasis on artificial intelligence’s implementation in these already tech-heavy funds. As AI evolves, quant funds can turn to machines to sift through millions of news articles and test models that make trades based on hypothetical world events, further diminishing the need for human intervention. Paul Tudor Jones said it best in an address to the remaining employees of his firm: “No man is better than a machine. And no machine is better than a man with a machine.”

Campus Events This Week

May 3, 2017

Guggenheim Securities Investment Banking Presentation Taylor A & B Statler Hotel @ 5PM

Open to: Freshmen and sophomores

RSVP on Handshake

Attire: Business casual

 

Dyson Sophomore Send-Off Warren B25 @ 7PM

Open to: Dyson majors

RSVP on Handshake

 

Class of 2018 Headshots & Resume Review Green Dragon Cafe @ 5PM

Open to: The Class of 2018

 

May 6, 2017

Toward a More Equal Workplace Summit 2017 hosted by ILR Women’s Caucus

Register here:  https://www.eventbrite.com/e/towards-a-more-equal-workplace-summit-tickets-33793021838

Current Events This Week

International

  • U.S. Secretary of State Rex Tillerson, pressed for harsher diplomatic and economic measures on North Korea at a recent United Nations Security Council meeting, in order to confront nuclear threats from Kim Jong Un’s regime.
  • The U.K. economy took a hit in the first quarter as consumers cut back spending, a warning sign of slowed growth in the future.

Markets                

  • The S&P 500 is within half a percentage point of all time highs and is on track to end the week up 1.6%.
  • U.S. stocks are on pace to end the month higher as investors chose to focus on strong corporate earnings as opposed to weaker economic data.

Tech

  • Didi Chuxing, China’s version of Uber, has raised $5.5 billion in efforts to expand to more international locations as well as develop its AI capabilities.
  • Amazon recently announced a new addition to its family of Echo products: Echo Look. The style assistant camera can judge outfits based on machine learning algorithms supported by data from fashion specialists. The product retails for $200.

Cornell Related

  • After being on suspension since September, Cornell permanently suspended the all-male acapella group Cayuga's Waiters for hazing.
  • Plans by company Distributed Sun to build two Solar arrays in Dryden has caused heated debate among the surrounding residents.  

Politics

  • Congress narrowly passed a bill that gave them one more week to keep the government open; by May 5th, they must try again to pass a spending bill for the fiscal year in order to avoid a government shutdown.   
  • Donald Trump agreed not to terminate NAFTA and reconsider the deal after President of Mexico Enrique Peña Nieto and Canadian Prime Minister Justin Trudeau urged him to re-negotiate rather than terminate the bill.

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Ortho Fit

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Current Events This Week

Cornell Related

  • Cornell has suspended its 5th Fraternity since the start of the semester, Kappa Alpha Psi.
  • A hearing board deemed Mitch McBride not guilty of violating the Campus Code of Conduct when he shared documents containing possible changes to financial aid with the Cornell Daily Sun.

Markets

  • Stocks were trading flat for the most part as investors look forward to the results of the French election and quarterly earning reports from firms.
  • Visa reported better than expected quarterly results and as a result has issued a $5M buyback of its class A stock.

International

  • Voting for a new French president is set to begin on Sunday and is currently locked between 4 candidates.
  • President Donald Trump opened an investigation into whether steel imports from China and other nations were a threat to national security.

Tech

  • Bose is currently facing a class action lawsuit amidst allegations of the company collecting private user data through its wireless headphones and then selling it to third parties.
  • Verizon reported its first ever net customer loss with almost 400,000 people leaving the network in the beginning of 2017

Politics

  • US Prepares to seek the arrest of WikiLeaks founder Julian Assange
  • Amidst the Venezuelan protests against the government, numerous foreign companies have been pushed out. The latest of these has been GM, which had existed in the country since 1948.   

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No Ridesharing in this Hitchhiker’s Galaxy

Uber and Lyft are the predominant ride sharing companies in North America today. Yet, their growth has not extended into upstate New York. While the two companies are allowed to operate in New York City under Taxi and Limousine regulations, they have been prohibited in the rest of the state for myriad reasons. Is there a change on the horizon?

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Cornell Graduate Student Assistants Seek Unionization

“An August 2016 National Labor Relations Board (NLRB) decision involving Columbia University categorized graduate students at private universities as employees under the National Labor Relations Act (NLRA), granting them the right to unionize and collectively bargain with their employers. Anticipating this reversal, Cornell’s administration signed a “code of conduct” agreement with Cornell Graduate Students United (CGSU) in May of 2016, agreeing to, among other things, a fair process in the event of a union recognition election.

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Comake: Rethinking Your File Browser

You should really start a company around an idea and not the other way around. And don’t do it alone, talk to people about your idea, and bring the best people together around it. This is your first sell. Most people don’t get multiple chances at this, so make sure you focus on something that really interests you.

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The Tesla Bubble

Last Monday, Tesla passed G.M. as the most valuable American auto-company. With a current market capitalization of $50.9 billion, Tesla’s stock has been climbing in recent weeks. However, the question on every investor’s mind: is this growth sustainable or is Tesla overpriced and bound to be a risky investment in the long-term?

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Amazon Go Not Yet Ready for Prime Time

Four years ago, Amazon asked, ‘what if we could create a shopping experience with no lines and no checkout?’ Shortly after, Amazon revealed exciting plans to open a computerized brick-and-mortar retail store in downtown Seattle. Was this a stroke of genius or is the program running into problems?

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Ongoing Brexit and Changing Globalization Trends

Since the British referendum to leave the European Union last June, there has been much speculation over how the UK plans to change its role as not only a European nation, but also a global one. British Prime Minister, Theresa May, triggered Article 50 of the Lisbon Treaty—which created the EU—on March 29, 2017, starting the two-year Brexit process. Now the country faces challenges with reconciling its Brexit goals.

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Campus Events This Week

April 17, 2017

Deutsche Bank-Global Transaction Banking Fireside Chat 151 Warren Hall @ 5PM

Open to: Freshmen and Sophomores

RSVP via Handshake and on Deutsche Bank website

Attire: Business Casual

 

What I Wish I Knew At 22 (Hotel School Young Alumni Panel) 5th Floor Tower Statler Hall @ 5:30PM

Open to: All

RSVP on Handshake

 

Information Session with GE Aviation 155 Olin Hall @ 6PM

Open to: All

RSVP on Handshake

 

Deutsche Bank Global Transaction Banking Coffee Chats Venue TBD @ 6:30PM

Open to: All

Register here

 

Morgan Stanley Cornell Student Ambassador Study Break Warren Hall B02 @ 7:30PM

Open to: Freshmen and sophomores

Register here

 

April 18, 2017

Meet Sun World President David Marguleas 170 Roberts Hall @ 1:30PM

Open to: All

RSVP on Handshake

 

April 19, 2017

Deloitte’s 2017 Human Capital Trends Presentation 105 Ives Hall @ 4:30PM

Open to: All

RSVP on Handshake

Current Events This Week

Cornell Related

  • Joe Biden to speak at Cornell Class of 2017 Graduation.
  •  John Novarr, Developer of Collegetown Terrace plans new apartments on Linden Avenue. Novarr hopes to target MBA students since the Breazzano Center for Executive Education, once finished, will be located next to the new housing.

Markets

  • S&P 500 was down 1.1% this week amidst worries of geopolitical issues.
  • Bonds and gold both fared well in the previous week as investors sought safer investments.
  • United Airlines has lost $570M in market cap this week after passenger was dragged off a United aircraft.

 International

  • Former Odebrecht SA, Latin America’s largest construction company, executive is tying Brazilian president Michel Temer to $40Mbribery scandal.
  • Russia, Syria, and Iran have unified on a common front in support of Syrian president Bashar al-Assad, stating that US accusations of a chemical strike by the Syrian government in Damascus are false.

 Tech

  • Uber has run into regulatory problems in both Denmark and Italy as the two nations’ governments try to oust the ride hailing company from the roads. On the bright side, Uber is resuming service in Taiwan after a 2 month hiatus.
  • Tesla has now surpassed both G.M. and Ford in market value coming in at a cool $50.9B.

Politics

  • Former Alabama Governor Robert Bentley was forced to resign after he plead guilty to using state funded resources to try to cover up his extramarital affair. Lieutenant Governor Kay Ivey was sworn in as the new governor following his step down.
  • President Trump has threatened to withhold critical subsidies for Obamacare if Democrats do not agree to negotiate a new deal.

Campus Events This Week

March 27, 2017

DSP Work on Wall Street Conference Terrace Restaurant Statler Hotel @ 5 PM

Open to: All

RSVP here

 

March 28, 2017

Hotel School Career Conversation with Brian Waldman, SVP, Peachtree Hotel Group 253 Statler @ 4:45 PM

Open to: Hotel School

RSVP on Handshake

 

JPMorgan Chase Information Session and Networking Night Statler Hotel, Ballroom @ 5:30 PM

Open to: freshmen and sophomores

Attire: Casual

Recommended to pre-register here and on Handshake

 

The Truth about the Nuclear Disaster in Fukushima and the Future of Renewable Energy” by former Japanese Prime Minister Naoto Kan Statler Hall, Statler Auditorium @ 5 PM

Open to: All

 

March 29, 2017

How Financial Markets are Changing- a discussion led by Lee Maschler, Founder and Principal Owner of Trillium 175 Warren Hall @ 5 PM

Open to: All

Attire: Business Casual

RSVP on Handshake