Chapter 367 AI? Is it AI? (First update 4500, second update is coming soon, checking)
Make small profits frequently, small losses occasionally, big profits occasionally, and never big losses.
This is the sixteen-word mantra for any investment, and it is also the only way for ordinary people to achieve class transition.
In fact, even people as powerful as Soros and Buffett cannot never lose money.
But their investment strategy ensures that the money they lose is always small and they will never suffer a big loss.
It's easier said than done.
Everyone knows the theory. Some people talk about overcoming greed and investing in value, but when they encounter the so-called bull market, they will still take out loans to invest in stocks.
Even if you really overcome your greed and invest in value, and find something that seems to have low risk and low returns, who would have known that the returns are actually quite low, but the risks are ridiculously high and go straight to your principal.
Even if you can avoid all of this and buy a fund normally, why do a bunch of black swans appear?
I wanted to beat inflation, but I didn't beat inflation, but I beat the gambling ship on the high seas.
In the first half of 3062, black swan events occurred frequently, from the global stock market crash and oil price plunge at the beginning of the year, which led to the increase in overall volatility of the US stock market, to the upcoming Brexit referendum in the UK and the ambiguous performance of the US Federal Reserve on whether to raise interest rates or not, all of which constituted huge uncertainty.
The birth of AI has led to a surge in technology stocks related to AI, and the entire market has shown a booming upward trend under the leadership of the AI concept.
But at this moment, the black swan came.
No, it’s not a black swan that’s coming, it’s a fucking big black bear.
The Alcatraz incident broke out.
In addition to causing an earthquake in Miami, the Alcatraz incident also led to panic selling and exodus of Miami stocks and bonds. The New York Stock Exchange and Nasdaq had to suspend trading the next day on the pretext of force majeure, and this suspension lasted for a full week.
When the market reopened a week later, the Dow Jones Industrial Average plummeted from 17,882 points to 16,000 points that day, and the Nasdaq plummeted from a high of 5,500 points to around 4,900 points!
This was the largest single-day drop in history!
The drop is bigger than when a plane hits a building!
A week later, the stock price continued to plummet. Even though the Federal Reserve injected liquidity into the market on the day the market reopened in early June, it still failed to stop the decline.
This is the first time in the history of Mai stocks that such a huge drop has occurred due to reasons other than a sudden economic crisis.
At the end of last year, the Federal Reserve announced that it would enter a cycle of interest rate hikes, but now the Federal Reserve has begun to reconsider whether to continue raising interest rates.
Obama directly stated that the Federal Reserve should stop the interest rate hike cycle and lower the federal funds rate by at least 50 basis points again to ease market panic.
Many people in the Great Zhou began to say that the country's fortune was unstoppable. The capital that was originally preparing to withdraw from the Great Zhou because Mai Country entered a cycle of interest rate hikes began to wait and see.
There are reports that Jude Yellen may be forced to resign and be replaced by 57-year-old Irish-American Brian Moynihan, chairman and CEO of Miami-based Bank, as president of the Federal Reserve.
Due to the constitutional crisis and the conflicts caused by the general election, Obama has declared a national state of emergency involving only government departments, giving the federal government temporary control over some state powers.
The existing members of Congress and senators were organized to form three temporary committees and a temporary acting congressional committee to quickly reduce the risk of national collapse caused by the constitutional crisis.
At the same time, it was announced that the general election date would be postponed to January 15, urging both factions to re-elect new candidates.
The reason for the delay to January 15 is that the law stipulates that the handover of power must be before January 20.
Of course, many other factions in Mai Country that had previously been affiliated with the two factions also began to stir and were ready to stand up and take up the banner.
The Greens, Liberals, Progressives, Labor, Renaissance... and some independent candidates have also begun to express their intention to participate in this election.
This is a once-in-a-lifetime opportunity!
For so many years, they have been tightly suppressed by the donkey and elephant factions. This time, it seems that both factions are shaky. Are the kings, princes, generals and ministers any different?
They are a once-in-a-lifetime opportunity, but the financial markets are in trouble.
It is conceivable that in the past half month, the financial market in the United States has almost collapsed, and the short-term impact has even exceeded the subprime mortgage crisis eight years ago!
But unlike the subprime mortgage crisis eight years ago, this time it was not a systemic problem in the entire financial industry and economy of the United States, but was caused by a black swan event. Many international hot money also believed that it was a good opportunity to buy at the bottom and took the opportunity to enter the market to absorb.
In addition, in order to calm the situation as quickly as possible, the WASPs reached some secret agreements with the Jude Group. Driven by many financial measures and policies, the market has begun to show signs of stabilization in recent days.
During this period, most hedge funds suffered huge losses, and even many index funds with inverse ETF hedging methods suffered large losses.
In this case, if you want to make money, you either need to have a cheat or insider information.
Silingsi has both cheats and insider information.
Before the Alcatraz incident broke out, 404 had already withdrawn all the funds from Fund No. 1 and started liquidation, becoming one of the few private equity firms in the market that did not suffer losses.
Otherwise, a small company that has just been established for more than half a year would not have been able to attract the attention of more than 100 institutional investors and BlackRock executives.
However, no one doubted the relationship between this small company and ASF. After all, the liquidation time of the fund product had been set before it was sold.
But even if they were lucky enough to avoid the constitutional crisis caused by the ASF, would they dare to claim that the risk of their No. 1 fund was no different from that of an index fund?!
They are short-term arbitrage products!
I’ve seen occasionally successful small companies become arrogant, but I’ve never seen a small company become so arrogant.
Moreover, it is an extremely backward trading model that uses short-term arbitrage.
Following Luo Ziming's screen sharing, the four large screens in the conference hall simultaneously displayed a dense list of historical holdings changes of the liquidated No. 4041 Fund.
After using the psychological invisibility of "ordinariness", Fang Yu, who was standing at the end of the conference room, shook his head.
What a good opportunity to show off and get slapped in the face, but these three idiots just let it go.
At this time, the correct approach should be to create twists and turns, lure a few doubters with ulterior motives to come up and mock you, and then pretend to be cool and slap them in the face.
It's too impatient to throw out your cards in such a hurry.
This child is truly incorrigible.
Many private equity firms display historical holdings of liquidated funds in such closed-door meetings, and this is sometimes even part of subsequent fund promotional materials.
Robert Capito, who had just entered, looked at the trio on the surface, but his actual attention was always on Jiang Nanzhen. He just glanced casually at the nearest large screen and couldn't help but widen his eyes.
This is……
In the next few seconds, exclamations came one after another in the venue.
It can be clearly seen from this detailed list of changes that the green operations basically account for 80% of the overall changes. The most important thing is that every change in positions has accurately coincided with market changes.
Even if Si Lingsi was lucky and their Fund No. 1 completed most of the operations and liquidations before the Alcatraz incident, how did they avoid the previous black swan events?
They used a short-term arbitrage strategy, and the high leverage under this strategy was not suitable for the financial market in the first half of the year.
"This is the historical change in the holdings of our Fund 1. You can see that we were lucky enough to have completed the liquidation of Fund 1 before this constitutional crisis hit, and it was not affected by it."
Luo Ziming's mind was quite active. Despite the high tension at the scene, he did not directly say the word "Devil's Island", but replaced it with constitutional crisis.
"Even if we exclude the impact of this unpredictable constitutional crisis, you can see that our Fund No. 1 was largely unaffected by other black swan events in the first half of the year."
"The largest loss was in April when the Federal Reserve delayed its interest rate hike announcement due to a surge in AI stock prices, which was only a 1.3% loss."
"This is mainly because..."
James Whitaker frowned and glared, while his allies were inexplicably surprised: "You didn't increase leverage!!!???"
At this time, everyone present had already reacted.
No leverage!!!
No wonder they say that Fund No. 1, which uses a short-term arbitrage strategy, is as safe as an index fund!
No, this may be safer than leveraged index funds!
Leverage is a risk amplifier and the most fundamental source of financial risk in the world today.
At the same time, leverage is also a source of wealth!
In the short-term arbitrage market, the leverage ratios of various institutions are basically between 3 and 10 times.
If the profit of a business is 100% and the principal is only one dollar, then you can only earn one dollar.
But it’s different with leverage. Originally, you could only make one dollar per order, but with three times leverage, you can make three dollars. With five times leverage, you can make five dollars. With ten times leverage, you can make ten dollars with one dollar!
Profits were magnified tenfold!
Before the subprime mortgage crisis, some hedge funds' leverage ratio on MBS was as high as 250 times!
Even now, although such high leverage ratios are rare in stock trading and the leverage ratios of high-frequency traders rarely exceed 20 times, in the foreign exchange market, ultra-high leverage ratios of more than 200 times are occasionally seen.
In any case, in private equity with an outdated model such as short-term arbitrage, not using leverage is relatively rare, but it does exist.
But they achieved a return rate of 482% in 100 trading days!
How did they do it without using leverage?!
This was completely unexpected by all institutional investors, including Robert Capito.
At the beginning, they all assumed that the company must have used a leverage of about 10 times and made a few successful transactions, which is why it achieved such a high rate of return within 100 trading days.
Previously, Larry Fink had speculated to Robert Capito that this fund company must have adopted a new automatic trading arbitrage algorithm similar to quantitative trading under a high-leverage model to achieve such a rate of return.
But now, all transaction records prove that they achieved this almost miraculous result using only their own funds!
This is a true miracle!
No, it should be said that this is a miracle!
Even Robert Capito temporarily forgot about his attention to Jiang Nanzhen, staring at the screen with his bright eyes. His bald head with a hairline receding to his occipital bone was shiny under the light.
How did they do it?
Could this be the function of the Woking system they were talking about?!
Luo Ziming said somewhat embarrassedly, "We're just a small, newly established company with insufficient credit standing. It's difficult for us to obtain high leverage from large institutions, and we also struggle to meet their disclosure requirements. But we're not completely without leverage. From May 3rd to 10th, we used triple leverage from Interactive Brokers."
"But, you see, this week our returns have plummeted, falling into the market average. We've analyzed that the leverage ratio may have affected the Woking system's risk assessment mechanism, causing it to choose a more cautious stock selection strategy, leading to a precipitous drop in returns..."
Luo Ziming had just said this when he heard a tall, bald old man standing next to the first row ask in a magnetic voice, "AI? Is that AI? Are you saying that your Woking system is the application of AI in stock selection strategies?!"
Robert Capito's eyes flashed as he stared at Luo Ziming.
The application of AI for automated trading in the financial industry is nothing new. As early as more than 30 years ago, programmatic trading had already emerged on Wall Street, mainly used for bulk transactions and arbitrage.
More than 20 years ago, James Simons founded Renaissance Technologies, whose Medallion Fund was the world's first quantitative fund, using complex mathematical models and statistical methods to conduct automated arbitrage and hedging transactions.
James Simons has also become one of the richest people in the world because of his breakthrough in the field of quantitative analysis. His average annual income exceeds one billion US dollars and his personal assets reach 20 billion US dollars.
By the way, James Simons is a mathematician and a member of the American Academy of Sciences. His previous partner was the mathematical master Chen Shengshen, who later returned to China.
After James Simons ushered in the quantitative era, countless mathematicians who originally had little to do with finance entered this field, conquered it, and almost turned finance into a part of applied mathematics.
Until the advent of flash trading and high-frequency trading, Wall Street has become the industry with the largest IT investment besides technology companies. Almost every Wall Street giant has several supercomputers and the world's most advanced servers, just to stay ahead of competitors by 0.0001 seconds and grab their business.
In this situation, almost every Wall Street company is constantly using model algorithms with higher prediction accuracy and faster efficiency.
Like BlackRock, the largest proportion of its employees currently are actually those with talents in IT and mathematics.
Linux, Java, PHP, Python, big data, blockchain...Here you can see almost all the needs of other IT companies.
Even the art design is included.
After the Orange model was born a few months ago, Wall Street giants including BlackRock also conducted research on it as soon as possible, hoping to use the AI model composed of neural networks to improve the accuracy of automatic trading.
Of course, they have also read Fang Yu's paper on the application performance of strong factor models in deep learning. Although they have also trained a strong factor model, the effect is not very good. Although the accuracy has indeed improved, the risk is also greater. The uncontrollable and black box characteristics of the large model further amplify this risk.
The financial market is complex and ever-changing, and is constantly affected by external changes. No matter how much data the large model has learned, it is still difficult to accurately predict future market trends, let alone the trends of individual stocks and sectors.
Despite this, the learning ability and potential demonstrated by AI still makes BlackRock wary.
Just the open source Orange Big Model 1.99 can reduce the workload of ordinary analysts by at least 70% after skill training.
According to BlackRock's professional industry analysis, it may only be a matter of time before a large model emerges in the future that can increase risk-adjusted returns (equivalent to accuracy) to more than 65% and control risks.
And now, judging from what this nerdy Da Zhou guy said, their Woking system is already using AI-driven automatic trading?
The Orange model only started internal testing in April. How did they get the AI?
Or is this just some more advanced algorithm?
In an instant, several thoughts flashed through Robert Capito's mind.
(End of this chapter)
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