morning! After dabbing in the genre, FT Alphaville has launched a series of simple Q&A interviews.
The basic premise hopes that it is interesting, mainly finances, economics, and business (some may be boring people who do funny things, or even interesting people who do boring things), and later publish an edited Q&A. I have no promises, but I try to do one a week.
We’re starting things out in a conversation with Giuseppe “Gappy” Paleologo, head of quantitative research at Balyasny Asset Management. There are several ideas about future victim subjects, but feel free to suggest them in the comments below. The transcript has been edited for clarity and length.
ftav: Hello Gappy. You are originally a Roman physicist. How did you get to finance?
I came to the United States to study for my PhD at Stanford. That last year I had a long internship at Enron and was vaccinated from participating in finance for the next 10 years. So I went to IBM research. After the crisis of 2008, at perfect timing, I decided to enter finances primarily for economic reasons. I had a child, it’s the usual one. It was not a marriage of passion.
However, I went to Axioma, a factor risk model provider, and was later hired by Citadel. And surprisingly, I had a great time at the Citadel. So I fell in love with what I was doing and have been stuck ever since.
What was the IBM research like?
IBM’s research was an incredible place for the first 40 years of its life. I had a colleague who spent a year tracking elephant movements in Africa as part of my work. I don’t even know why. It’s great to be a lab that is almost synonymous.
There is a lot of research funding, you didn’t even have to ask, and you will be evaluated once a year by your manager. As a result, there were a lot of really good research that never got monetized.
However, in the 1990s, IBM began to abandon thousands of people to move to personal computers. That was the beginning of the end. I had to start collecting some of my salary through consulting. It wasn’t fish or chicken. It wasn’t basic research, not applied research, but all the good people left behind over the years on Google, Yahoo, or Wall Street.
I have found an interesting paper from your time. The title is the optimality of online greedy algorithms in the issue of Carpool and Chair assignment.
It was with a much better mathematician than me. The carpool problem is a beautiful problem that is actually a dynamic system that occurs in many different fields. Travelling Salesman Problems, Carpool Problems, News Vendor Problems – they are all beautiful names for the class of formulating applied mathematics. We don’t use travel salesman issues for sales, we use them for chip design.
You worked in many hot places, including Citadel, Millennium, Hudson River Trading, and the current Bariasny. What are their similarities and differences?
Hedge funds are highly imitation organizations, so the key to understanding the differences between hedge funds is the difference in personality of founders. There are absolute leaders, and those who report to them tend to mimic leaders. Over time, they acquire the same tics and personality traits.
Citadels are generally very driven. Ken Griffin must be one of the most competitive people on the planet. This obsession, this drive is a constant for the Citadel.
Ken is a huge believer in technology and is a sustainable learner. So, the Citadel fails many times, but in the end it becomes very correct. And this kind of sustainability is beautiful.
How does it compare to the Millennium?
In another hedge fund manager’s words, Citadel is like Singapore, while the millennium is like the United States. The Citadels are small and centralized, while the millennium is highly dispersed.
Someone once told me that the millennium had achieved diversification by chance. I don’t know if that’s true or not, but it has become inherently diverse and very scalable. They have mastered the techniques of scale, possibly at the expense of efficiency. That’s the key to understanding the millennium.
Instead of shaping your portfolio manager in the company’s way that Citadel does, adapt your company to your PMS needs. And this is often paid off in some cases grandly.
He also added that Izzy (England, founder of the Millennium) is a humble man and he has a very good risk instinct. It’s kind of like Jedi power.
So, what is the Hudson River deal? Canada?
HRTs are very different animals. It’s basically a technology company. Engineers are true top citizens and I can’t say about the hedge funds I’ve done.
Argo Engineers are probably a little higher, but HRT has a high reputation for good core developers. Incidentally, Jason Carroll, the remaining founder of HRT, who is still an active partner, was the core developer of legendary skills. If the most important person in a company is core development, the equation changes.
It is a very supportive and friendly place and I admire the technical excellence very much. And they are very correct in the technology. They tried a lot, but not everything went well. However, their technical bets paid off very spectacularly. If you’re ignoring Jane Street or Susquehanna (it’s actually a trading company rather than a technology company), I think HRT is the second best company (of a major trading company). And it could overtake Citadel Securities.
And Bariasny?
I’ll know Bam forever. I’ve been there twice before, and the third one is fascinating.
BAM also acquires the characteristics of the founder. I once asked Dmitry (Balyasny) to explain the company with three adjectives, and he said he was “humble, supportive, cooperative.” I think it’s actually true. That’s not the performance Kumbaya collaboration. BAM does not use buzzwords. But it’s pretty open. And it is a learning organization.
Dmitry is a trader in his mind, and like Izzy, he has great instincts and humility. As a result, BAM is very trade oriented and managers tend to be very humble.
Did you hear that when HRT first approached you, you thought it was standing for hormone replacement therapy?
yes! I had never heard of it before, so I googled it and it was the first thing that came up.
The different styles of quantitative investment and trading can be a bit mystical for many people. Are there any rough taxonomy useful?
The best way is to look at the alpha source. There are also really three ways to make money that both Quant and basic investors use.
The first is the risk premiere. This is by far the largest of the three. All donations, all sovereign funds must be allocated to a large capacity base index or asset class and be compensated for taking any risk, such as credit risk, liquidity risk.
The second is the advantage of information. That means seeing the same data as everyone else, as long as no one is cheating, but with more informational analysis, you can come up with better predictions for the future. This is the core of long-term basic stocks, statistical arbitrages, or qualitative credit investments.
The third one is Arbitrage. At its core, the arbitrage violates the one price law. It’s a situation when you and I have different constraints and preferences and someone can exploit this. A good example is physical exchanges.
These three classes are not separated. There is a duplicate. Large companies tend to succeed in multiple areas, but most tend to dominate in one.
For example, AQR is primarily a risk premium shop. Two Sigmas are mainly information shops. Jane Street is an arbitrage shop. HRT is an information shop. This is because most P&L trades high frequency, and high frequency trading is an information strategy.
You need to consider the dominant strategy in each company, and then you have an idea of what the culture is like. Culturally, HRT is not like Jane Street. One is a high-frequency, quantitative, information strategy shop, and the other is an arbitrage shop.
There has been a lot of talk about how multi-managers and multi-strategic companies such as Balyasny, Citadel, and Millennium are growing, but the majority of the rest of the industry is stagnating. Do you think this will continue?
Honestly, I don’t really think this trend is new. It is now more visible and attracts the attention of journalists. But that was the same trend as in 2019. And a good prediction of zero information is that if something has been going on for 20 years, it will probably last for another 20 years. I mean there is a structural reason to believe that the importance of the platform is merely growing.
I have written two books on quantitative investment. Both are dedicated to tofu. Who is the tofu?
Tofu is my cat! It’s British short hair. Usually I wrote a book among non-competitors and my cat is with me.
So the first one is called advanced portfolio management, but that’s an overview of quantitative investments, while the second one is called the component of quantitative investments, but is it actually more hardcore for Quant Practitioners?
That’s right. I actually wanted to call my first book the Grimoire of Portfolio Management. But my editors didn’t know the term Grimoire, and the rest of the editorial board there thought it had something to do with magic. I thought “advanced portfolio management” was bullshit, but the editors thought they were right. He’s been doing this for 20 years. This was my second book, and I liked the “elements.” . . ‘Formulation.
I don’t know. I think Grimoire has a bit of extra pizza. But why write a book about Quant Investing?
Because I am not a financial figure of the heart. I don’t mind, to be totally honest, especially money or finance. I am motivated by people and in my job I have had a lot of questions from the portfolio manager. So I thought I would write a short book to explain all the basic concepts to them. The first book is truly a love letter to a portfolio manager.
This is the second book I’ve always wanted to write. I really believe in exchange of ideas. I really think we’re obsessed with not sharing ideas. I think you can share a fair amount of ideas without causing any harm to anyone, and that’s good for society. I hate writing. Writing is very painful. But I like to think about the issue. And it’s a very basic book. It is basically a letter to my past self from 10 years ago.
I saw you say, “Boys use copulas and men use volatility and correlation from the perspective of risk management in investment.” Can you explain it to me?
When you talk to quantitative people who are obsessed with techniques (especially sophisticated techniques), it’s a good heuristic to lose weight. The practice of a good quantitative modeler is not just about applying the most sophisticated techniques in any industry, not just finance. This is to use the simplest technique that will help with problems at hand.
Volatility works. It’s not perfect, but this is not a good reason not to use it. Other metrics seem to be accurate at face value, but they are often more vulnerable. Maybe vol is not beautiful or the last word. But people need simple, common language to advance.
You said you are not truly a financial figure of the heart. If you were leaving again today, would you go to finance?
It’s difficult to say. First of all, it is a sector that has not grown as a whole. Secondly, there are some very interesting issues with biology and computer science. Works with AI, works with drug design – also works with logistics. If I was younger again, I would work in an area where people don’t see now.
So, if you’re going to retire and do something completely different, what would you do?
That’s a good question. . . Unfortunately, this does not only mean retiring from finance, but also retired from wife, but I also want to be a monk. Honestly, that’s my ideal job. I love loneliness and contemplation.
