NYC Hedge Fund Trains Computer to Pick Stocks

It’s hard to be a human these days with rollercoaster moves in the stock market. New York City hedge fund Rebellion Research is teaching a computer to make buy and sell decisions in the stock market.

In an interview on Fox Business News yesterday, the firm’s young entrepreneurs explain their strategy of teaching machines to make investment and trading bets. While this may not seem earth shattering to Wall Street insiders who are quants or know about artificial intelligence, the interview offers a glimpse into how the younger generation of mathematicians and computer scientists think about the man vs. machine relationship to investing.

“What makes us unique, is that we’re actually getting our algorithms to learn automatically from the data. So rather than saying we know exactly how to invest, we are teaching our computers to learn how to invest,” said Spencer Greenberg, who is CEO and chief software architect of Rebellion Research. [Rebellion Research presented at Advanced Trading’s Buy Side Trading Summitin 2010].

The hedge fund began investing in 2007, after it raised $1.2 million in capital from 2005-2007.

What’s also interesting is that Greenberg is the son of baseball Hall of Famer Hank Greenberg. He along with Rebellion’s Chief Scientist Jeremy Newton developed the algorithms that the hedge fund uses to make stock picks. The computers are looking for subtle patterns financial markets. While Greenberg doesn’t really divulge any secrets behind its strategies, he cites advantages of machine-based investment decision-making, such as being able to mathematically crunch data on a wide universe of stocks.

While a computer can process information on 7,000 stocks, there is no team of analysts that can cover 7,000 stocks, said Greenberg. Though he acknowledges that the analysis of a company is not as in-depth as made by a human, he cites the advantages of the computer. If the computer is covering 7,000 stocks, it can be more selective or confident about the ones it invests in, whereas a human who can only cover 30 stocks, has fewer options, contends Greenberg in the Fox Business interview.

However, Fox Business is unable to verify that the hedge fund, which has $14 million in assets, has made money year-over-year. But the Fox Business reporter cites reports that since its launch in 2007 it beat the S&P 500 index of stocks by an average of 10 percent.

What’s not visible in this video is how the machine is making buy and sell decisions behind the scenes. On the other hand, like IBM developing the Watson computer to play the game Jeopardy, which can beat most people, Rebellion Research’s team is convinced that machine learning is the wave of the future.

The firm’s commitment to artificial intelligence — training computers to emulate the logical processes of the brain without the emotions — has caught the attention of leading investors, like Jean-Marie Eveillard, French-born international investor who currently serves as the senior investment adviser to First Eagle Funds. According to the video, Eveillard is reportedly interested in the machine’s “no fear motto even when the Dow plummets 500 points.” When the market zigzags 500 points in a day, human traders get fearful whereas the machine is able to make more rational decisions, Rational’s colleagues maintain in the video.

And if you don’t believe in machine-based learning for investment purposes, Greenberg tells Fox viewers that he can use math to improve a person’s love life. If on average it takes a person one year to find someone they want to date, if they are able to double the amount of people they meet in a month, without sacrificing the quality, they could halve the amount of time it takes to meet someone. So it’s possible that Rebellion Research has another business up its sleeve, with even wider appeal.

For the full Fox Business News video: