The Unrules: Man, Machines and the Quest to Master Markets

This book, The UnRules, is about languages of many kinds: scientific, mathematical, computer, financial, biological. It’s about codes, patterns, and signals, and the attempt to extract order from a noisy world. The notion of the UnRule, which lies at the heart of this book, is a kind of philosophy, based on empirical experiences both in financial markets and in life, where no rule, dogma, ideology, paradigm, or model lasts forever and no trading or market relationship performs as you expect all the time.

Author’s Note:

Like a tether on a balloon, the UnRule limits the reach of all the other rules I’ve gathered over the years. For me, an intense involvement in competitive markets, and in building my career and my quantitative investment firm, WorldQuant, led me to develop rules that apply not just to trading but to life. Many of those rules are rooted in an always uncertain future. This is reflected in my firm’s deep involvement in developing alphas – that is, algorithms that seek to predict certain market relationships. The alphas we develop, now numbering in the millions, consist of mathematical expressions and computer code. We rigorously back test them with historical market data to “simulate” their performance, just as video games simulate different realities. Much of this investment process is extensively automated.

And yet we do not just hand over trading to machines. People matter. Over the years we have learned a lot about alpha design and development. We’ve learned that no matter how well an alpha is back tested, it will probably not perform as well when we put it into real markets, and like the rules, no alpha lasts forever. We’ve learned about the use and dangers of correlation, the management of risk, and the deployment of extraordinary numbers of alphas. We’ve developed a sense of when to assume risk and, very importantly, when to take losses.

Along these lines, I have found that some life decisions have no clear solutions. For many years I made disciplined but incremental empirical decisions – hiring, for instance, only when I could find genuine talent. There was no master plan. Eventually, we discovered we could find the brightest people in quantitative fields and teach them finance. Smart, motivated people learn quickly. That search for talent transformed WorldQuant into a global firm, exploiting the fact that talent is universal but opportunities are not.

The UnRules ends with that curve of exponential growth in alphas bending toward the sky. In WorldQuant we have built a company uniquely suited to this dawning age of broad exponential growth. The UnRules is not a long book, but I hope it conveys a sense of the ceaseless searching and testing and experimentation that occur at a firm like WorldQuant. In fact, this book is about beginnings rather than endings. I’m still not a believer in using too many words, but there will be more to say as we explore this new world in more profound ways.

Many books have deep roots. The UnRules goes back to my childhood, listening to my parents practice their music every day in our apartment in Minsk. Authors often thank their parents; none of us would be here without them. But mine embodied many of the virtues that found their way into my rules: hard work, persistence, discipline, goal setting, the willingness to take a risk to reach a valuable end, all bound together by love. And without Millennium Management’s Izzy Englander, WorldQuant would not exist. He has been my boss, my mentor, and my friend for many years.

Contents:

• Quake
• The UnRule that Rules the Rest
• Parallel Universes
• Signal and Noise
• Waves
• Correlation
• Scaling Up
• An Exponential World
• Quant Biology
• The Age of Prediction

The Unrules: Man, Machines and the Quest to Master Markets By Igor Tulchinsky pdf