Bronte Media

I dropped in to the money:tech conference the last two days thanks to Mike at Altos Research, who was speaking there.

Here are a random stream of thoughts.

Highlights

John Seo/Catastrophe Bonds: I was most excited to hear John because of the fawning profile Michael Lewis wrote last year. Told the story of how Warren Buffet made $500m underwriting catastrophe bonds that limited his exposure to $1bn in the case an event of 3% probability existed. Higher yield of catastrophe bonds isn’t explained by risk but if you look at the market from a blackjack/card counting point of view it does (couldn’t explain in depth because of short speaker time). Conclusion: I’d love to work for him.

Alex Forshaw: Guy who reads 300 blogs/forums a day and makes large bets on for-money political prediction markets like InTrade. Intro to the panel he was on said he accounted for as much as 15% of all activity on InTrade at one stage. Amazing thing to me is the spawning of these alternate financial markets leaves two options for the Government: To call them financial innovation or to lump them in with ‘betting’. The US has zero clue about this and so all the money will go to the UK and elsewhere.

Steve Skiena: Steve is the inner nerd I never had the compulsion to fully be. He modeled an obscure sport called Jai-Alai and made a lot of money betting on it. The key for him was that the vanilla outcomes tend to be priced efficiently (i.e. who wins and loses) but the more complex derivatives (e.g. trifecta) were inefficiently priced and so he could make riskless money.

This is an analogy for the wider financial markets methinks. As in, the credit derivatives and CDOs became so complex because a few could make money with that complexity and dumber people not understanding that complexity lost money. When this ‘mess’ is ‘cleaned up’ the same will rear its head in the financial markets no doubt.

Justin Wolfers. Assistant Professor at Wharton. Props because he is an Aussie. Most fascinating thing in his study of prediction markets (with money): that people tend to overestimate the likelihood of unlikely outcomes. That is the underdog bias. If someone has 5% chance they win in actuality, people are usually wiling to bet the probability is much more (say 8-10%).

Overall thoughts

There are so many clowns crawling news and trying to extract meaning from it for financial investors. I am sure they provide as much value as Bloomberg at half the cost. But what happens when another person comes along half the cost of them? Rinse and repeat.

I would like to work at a Hedge Fund. They seem to combine the entrepreneurial traits of a startup and the interestingness of finance. They also live or die by their performance and there isn’t any bureaucracy to shield that.

There are many strong cliches in the finance industry.

The smirking secretive ‘vice president’ at a bulge bracket firm who wears an Armani uniform, is balding and always under 5 foot 8. The kind of guy you might run into at a strip club but who wont let his teenage daughters go to a party or date boys.

The boistrous trader who has put on 10 pounds each year he has been out of college, who doesn’t wear a tie and asks questions like “Are you making money today?” but never listens to the answer.

The quiet, considered hedge fund manager, who pairs jeans with a sports coat and is not afraid to say the word ‘fuck’ in public.

And the listen-only poney-tailed nerd who can only give the world around him partial-attention while he tinkers away in a terminal window.