Computational Investing

Lesson 1: So you want to be a hedge fund manager?

• Introduce investing from a hedge fund manager's point of view

Reading: "What Hedge Funds really do", Chapter 2: So you want to be a hedge fund manager?

Lesson 2: Market mechanics

• How exchanges operate
• How orders arrive, are executed
• Buy, sell, market/limit
• Crashes

Reading: "What Hedge Funds really do", Chapter 4: Market - making mechanics

Lesson 3: What is a company worth?

• Why does it matter?
• Prop: Magic money-making machine
• Mismatch between what a company is worth and how they are valued in the market
• Take into account dollars in the future

Reading: "What Hedge Funds really do", Chapter 5: Introduction to company valuation

Lesson 4: The Capital Assets Pricing Model (CAPM)

• One of the fundamental discoveries/advances in finance
• To estimate how much a stock will go up or down, multiply market movement with beta for the stock

Reading: "What Hedge Funds really do", Chapter 7: Framework for investing: The Capital Assets Pricing Model (CAPM)

Lesson 5: How hedge funds use the CAPM

• Use CAPM to figure out ratio in which you want to buy/sell stocks, go long/short
• Time scale: Change allocations weekly - monthly
• Potentially applicable to high-frequency trading

Lesson 6: Technical Analysis

• Ways to generate some sort of forecast about a stock, looking at recent volume and prices
• Contrast this with using fundamental data about a company
• Indicators (like Bollinger Bands)

Lesson 7: Dealing with data

• How data can be bad
• Actual & adjusted
• Survivor bias

Reading: "What Hedge Funds really do", Chapter 12: Overcoming data quirks to design trading strategies

Lesson 8: Efficient Markets Hypothesis (short)

• Hypothesis: What we want to accomplish in this course is impossible!
• Market responds to any piece of information, so we can never predict a stock movement and use that to our advantage

Reading: "What Hedge Funds really do", Chapter 8: The Efficient Market Hypothesis(EMH) - its three versions

Lesson 9: The Fundamental Law of active portfolio management

• Idea 1: Little intelligence about a lot of stocks
• Idea 2: Deep intelligence about a few stocks

Reading: "What Hedge Funds really do", Chapter 9:The fundamental law of active portfolio management

Lesson 10: Portfolio optimization and the efficient frontier

• Deeper knowledge and philosophy behind portfolio optimization

Reading: "What Hedge Funds really do", Chapter 10: Modern portfolio theory: The efficient frontier and portfolio optimization