Epsilon Theory is Dr. Ben Hunt’s ongoing examination of the narrative machine driving human behavior, political policy and, ultimately, capital markets—an unconventional worldview best understood through the lenses of history, game theory and philosophy.
Ben’s originally from Alabama but now lives out in the wilds of Fairfield County, Connecticut, on a “farm” of 44 acres. While his pre-electrification, dairy farmer grandfather may’ve laughed at his calling his modest spread a farm, Ben’s learned a few things over the years from the farm and its animals, and they’ve helped him become a better investor. Here are his notes from the field in this regular Epsilon Theory feature.
From our A-Team of seasoned subject matter experts, the Narrative is an evolving stream of perspectives and insights on a broad range of financial subjects and asset classes. Please read, enjoy and share.
To understand the impact of catalytic narrative forces, we have to monitor the vital signs of the capital markets they affect. To analyze the big picture through the lenses of game theory and history, we must also examine the details through lenses like volatility, momentum, income, correlation and inflation. These are the indicators of systemic vitality and stress—the fine details we use to fine-tune our worldview. We hope they help you sharpen your understanding of the investable universe.
Dr. Ben Hunt hosts the Epsilon Theory podcast with co-hosts and special guests from financial services, the financial media *gasp* and beyond. The Epsilon Theory podcast is the quickest way to get all of the unconventional perspective, historical context and narrative analysis you’ve come to expect from Epsilon Theory pumped directly into your head.
We’re growing our family of Epsilon Theory contributors to include a broad range of voices on an evolving range of subject matter. If you listen to the podcast, you’ll recognize some of the names as colleagues, partners and friends of Ben from Salient, any number of past lives, and the growing circle of outspoken truth-seekers in financial services and beyond.
Epsilon Theory author Dr. Ben Hunt is frequently quoted in print, radio and TV appearances.
Salient Partners is the proud parent company of Epsilon Theory. Salient is a diversified asset management firm and leading provider of real asset and alternative investment strategies for institutional investors and investment advisors.
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The meat really starts to kick in the section ‘There Are No Shortcuts’ and reaches peak lucidity in the section ‘Organizational Structure’. Excellent work by Leigh Drogan, Founder and CEO at Estimize, laying out what I really do believe is the blueprint for success with ‘next gen’ strategies that are foundationally systematic and substantially software-encoded:
Portfolio Manager — Of all the roles this is where I think things really need to change in terms of who sits in this seat. It can no longer be hedge fund bros, they simply won’t survive here. Nor will the pure gunslingers and tape readers, gone. And you certainly don’t want the pure quants sitting in this seat. PMs of the future are going to be far more interpersonal and process driven…. This is a cross functional role, and one that needs to be based on the behavioral attributes of the person more than anything else. An MBA may be useful here, but I would even say that having experience working at the early stages of a startup as a CEO can add a lot. I’m waiting for someone to develop a firm to leverage psychometric testing for different investment strategies so that we can identify people tuned for momentum vs value. You’re talking about a completely different psychology between those two people and it’s imperative you choose the person correctly … PMs should have some training in statistical and quantitative methods in order for them to talk intelligently with the quants and trust the factor models. Without that trust, there’s simply no point in having them and you’ll only gain that by understanding how they are built. Should a PM know how to code, no. Should they understand what the code does and why, absolutely. Basic data science classes can provide this knowledge. Quantitative research methods 101 in college is a requirement … I believe that compensation structures for the PM need to change. This is no longer “his book”. He is another player on the team, who has a specific role, to coordinate the dance. But in many ways, he will have less impact on the alpha generated by the book than the analysts or the quants who create the factor models. The PM is now the offensive coordination calling the plays, not the quarterback on the field scrambling around and throwing touchdowns. We can now compensate analysts accurately for the efficacy of their calls, and the PM for how much alpha she adds above them. The rest of the team should be bonused out based on the performance of the book.
Our basic idea with our DeepMoji project is that if the model is able to predict which emoji was included with a given sentence, then it has an understanding of the emotional content of that sentence. We are training our model to predict emojis on a dataset of 1.2B tweets (filtered from 55B tweets). We can then transfer this knowledge to a target task by doing just a little bit of additional training on top with the target dataset. With this approach, we beat the state-of-the-art across benchmarks for sentiment, emotion, and sarcasm detection.
Check out the online demo here, more detailed write-up here, and full technical paper here.
Useful skills like VR, NLP and… econometrics?
This list of fastest-growing freelancer skills compiled by Upwork, a job site that matches freelancers with employers, is just so odd I feel there is either some deep pattern coded in there that explains everything, or else some intern at Upwork is having a laugh.
Growth in VR and NLP makes total sense given the relative lack of experienced talent vs growth in demand, especially for VR developers. Neural network and Docker development for the same reasons. Adobe Photoshop freelancers — sure, I guess Photoshop is still operated by a priesthood although it’s unclear why the journeyman priesthood is growing rapidly.
But then Econometrics, really??!!? — never, ever, in my life have I thought “what I really need to do is to hire a random econometrician over the internet”, and for sure that thought has not been exponentially increasing of late.
And Asana work tracking, which had only around 20,000 paying customers a year ago?!!? — that’s like having ’Tesla car polisher’ on the list.
Anyway, I leave you to ponder. It certainly is an intriguing list — perhaps what we need is an econometric hireling to make sense of it for us…
And finally and frivolously, we have this article which is pretty much a total waste of storage space as it is a 700-word, not-very-good takedown of a new not-very-good mushroom-identifying mobile app with sub-par mushroom image recognition. However, it warrants inclusion in this week’s Rabbit Hole for the one immortal line:
There’s a saying in the mushroom-picking community that all mushrooms are edible but some mushrooms are only edible once.