From 0 to 1: learning about finance, part I

This post is describing my personal journey learning about specific areas of finance (in this part, hedge funds in particular). I originally wrote the following in 4 parts, describing the progression of familiarity I had by mid-summer of 2017. At the time, I was interning at a hedge fund as a software developer and had been writing blog posts to keep track of my learning and new experience.

I’ve later gained different perspectives and knowledge on what I then thought and finance in general, which I’ll explain in later parts of this series.

This is an interesting topic that I failed to address before. And this is an interesting story that dates back to before this internship started.

I hated finance, or that I had zero knowledge about anything related to finance and was repelled strongly by the name of it. I didn’t know how stocks work, what banks do or what different types of funds mean or have never even heard of the word “hedge fund”.

For reasons, I can think of a few: I took Econ but I didn’t find it attractive. My parents or close relatives do not work in finance and I have no contact directly with the industry. When I grew up, finance had always been this mysterious shiny object that people pursue and I rejected it instinctually as a rebellious act to becoming another profane adult who cares too much or only about money. Instead, I held science and engineering as a higher, purer pursuit where I could make contribution to technology and human advancement.

This is what I did in college as well. I never liked finance, and although I went through the tortuous path filled with temptation of the shiny degree, glorious job (not really), and peer pressure (from my Chinese peers mostly) of whether or not to get a degree in Wharton the majority of my freshman year, I did not end up doing it. Not doing a second degree has made me happy and focused in engineer and I did not ever attempt to force myself into finance concepts or activities ever again.

Until I decided to interview for finance companies and decided to come to 🍌. I am working at the biggest hedge fund in the world. Wait, what? What is a hedge fund? I watched the Khan academy video of what is hedge fund and I learned a few things: about 2 and 20, that hedge funds are making money in a zero-sum game, that hedge funds are mysterious and under-regulated. Wait, what? They sounds like the source of all evils in finance. They probably are, and I guess I am working at one of the darkest ones.

I tried to understand what hedge funds are, but failed: “They hedge against the market” — I don’t even know what hedge means! Why is there no explanation! “they are different from pension and mutual funds” — I literally do not understand any of these other funds, and then I go into this chain of wikipedia searches and put myself to sleep looking at those terminologies for long enough. “they invest in big investors’ money” — wait, so I can’t put my money in a hedge fund and just let it help me grow my money?

What about other things in finance? I did not know that Goldman is an investment bank (along with other things); I did not know what investment banks or people who work as analysts do; I knew there’s Nasdaq and companies go public, but I didn’t know what IPO really meant or which color is good/bad in the stock market; I’ve heard of bull and bear from the 08 crisis but still couldn’t tell which one’s which; my Wharton friends mentioned buy-side and sell-side and I really had no idea what they were buying / selling — it makes no sense; Two sigma and Jane Street recruit, and all I know is that they do something with making money off the market; I did not understand what is Sales&Trading, what is M&A, what’s the point of company evaluation, why people care about company accounting reports… I can go on forever, but I not only do not care, I lack a basic understanding of anything related to finance.

When I called a 🍌 engineer on the phone and he asked me if I know what “arbitrage” means, I had no clue. He tried to explain, but you know, what didn’t make sense just didn’t. I had small panics thinking of what would happen if I knew nothing about anything that they were talking about. During the team selection period, I was caught between two choices: 1) get into the team that has the most intense 🍌 culture and does what 🍌 is famous for 2) get as far away from finance and work on the purest of tech one can find at 🍌. Later I was told that I was put on trading. Man, this is nerve cracking. I guess I have to know more than what I did (which is literally NOTHING!)

I looked up a list of intro finance books, and made plan to learn “how to trade stocks”. I started reading “the big short” and it got me engaged: I watched the movie half-way into the book (which I think was a great idea because otherwise I would probably zone off by all the terminology early into the movie).

All I understand about 🍌 is that it’s a big hedge fund and very profitable. But a lot of things don’t make sense: “it’s a macro hedge fund trading on fundamentals” — yeah you can imagine how many words in this description I didn’t understand. “its flag ship fund pure alpha, has been closed for many years” — what is alpha, something that is different from beta, so what is beta? What, it’s closed? so they don’t even want money any more? Are you kidding me?

I went to 🍌 website to check out daily observations, which is 🍌’s white paper that it shares with clients and investors about its view on economy and markets. It has been valued significantly by even government regulators and renown people including Obama as an insightful read on market trends and predictions. Of course most of them are proprietary, duh. But there’re a few on the website and the most recent one was about populism. Man I might never understand 🍌: I have not even heard of the word populism before that. I admit that I was not very trendy when it comes to politics and news and I should have heard of it earlier if I paid attention. It was interesting, where they see 🦍 as a populist, and try to analyze economy under other historically populist leaders across the globe. It was very much an interesting read on history with charts about the markets and I had a great time learning about those leaders and what their policies were.

I started reading other books especially focused on hedge funds and made a good decision to read “More Money Than Gods”. I did not know that hedge funds started as early as 1949; I did not know that hedge funds have the history of being in CT (I thought for a long time that it was because of Ray and 🍌). It was amazing to know how many hedge funds there were in history, how they made their money differently, how they looked at the markets, what they did wrong. I also tried to stay critical and get my own take of whether it’s evil and corrupted.

I learned about other names in hedge funds for the first time. I learned about what hedge funds do besides the irrelevant fact of “2 and 20”; I learned about what hedging really means, what is alpha and beta, what is leverage and de-leverage, what is long or short; I heard of the words, equity, futures (and realize that it does not mean future in time anymore).

I read more books about trading, learned what quant trading means. I started reading flash boys, trying to understand what high-frequency means.

In short, this process of learning through reading has been so fun and so satisfactory for me. It is not boring and pretentious to me any more. I am learning voluntarily.

I also started using my Robinhood account. A friend from school helped me a lot where he taught me how to use the app and how he chose his stocks. I looked up videos and articles about stock recommendations for days before I actually bought anything. I bought stocks based on those recommendations. The excitement made me check prices constantly, as a validation of me choosing the right ones to make money. I did okay, where I didn’t lose money. I told my parents hey I just learned to hold my own stocks. My friend was right, being invested in stocks made me naturally pay more attention to the markets, how companies are doing etc. I would watch out for news about companies releasing their quarterly reports and make my own predictions to buy the promising ones. I made money this way and was happy. I remember how my roommate at the time made a decent return, when NVDI increased 10% in one day. He was an aggressive market watcher and he would talk a lot about his stocks, show me when some stock price dropped to 1 cent for a short time and how he caught that at the right time and made another fortune; he would talk about cryptocurrency when the price rose a lot in the market — all those things that made zero sense and that I had zero interests in before. These are all stupid in the eyes of anyone who trade or hold stocks. But everything was new and non-trivial for me.

I learned more about stocks holding and trading as time goes and changed my strategy accordingly.

Being at 🍌 has been the one of the best finance education that I’ve received. Although I do think 🍌’s competitive edge is wearing off where more people are having similar view of the markets and that quantitative and high frequency firms have been ripping off a lot of profits in the market (later I evolved and know slightly differently, but irrelevant to the rest of this story), I appreciate 🍌being a macro and fundamental (will explain later) hedge fund where it analyzes the global markets closely.

I don’t know how valuable those knowledge is, but I enjoy the fact that I am learning so much about a different field, about things that I never understood before.

🍌 is a macro investment manager that invests institutional investors’ money in fundamental, diversified and systematic way. Macro meaning that it invests on an international, long term scales and invest in currencies base on global policies and trends a lot. Fundamentals meaning that it analyzes markets by economic theories instead of data mining or pure statistical modelings/predictions. Diversified meaning that it invests in different assets and instruments. Systematic meaning that logic is extracted from decision making and is universal across situations.

I watched the investment videos where CIOs talk about the three funds (pure alpha, all weather and optimal portfolio), what is alpha and beta, how to calculate risk to return ratio, formula for calculating total return, how to think about investing…

There are so many other resources to learn: daily observations, Ray’s book on economic principles, other documents on investing and markets, and just talking to people. I learned about European financial history in the past 10 years post 08 in a much more systematic and comprehensive way. I learned what are the business problems that AM interns are solving, how to find optimal solution given risk exposure and expected trade quantities, why it’s necessary to “version control” economic reports (so-called time series data)… I understood what brokers mean, what is T-1, T+2 in the finance context. I take the task of understanding what is a T-bond, treasury bill… (although I still don’t know) more seriously. My goal here is not to be an expert or to dive deep into the world of finance, but it feels so satisfying learning, and finance and markets do not feel so disgusting anymore.

I still hold my skepticism towards hedge funds and other trading firms because it is a zero-sum game (or negative considering transaction fee etc.) and if some are making money, it is also an indication that others are losing. Skeptical of whether hedge funds like 🍌 drive the market to more efficient equilibrium or if they are contributing to more imbalance. Skeptical of whether they are taking money away from average people and causing damage to the innocents. Skeptical of their actual values if they are not making value but earning value by being smarter than others. Skeptical of how 🍌 is going to behave amid this new world of more and more quant and HFTs.

This journey has been tortuous but ultimately rewarding and fun.