What are algorithms?
Will Algorithms always win?
Algorithms are everywhere
Algorithms are pieces of computer code that give a specific output when certain conditions appear. Algorithms are in every corner of our lives.
When traffic slows on the highway, an algorithm determines that the signs above the road should be on 60 or 40.
When you open the fridge door, the fan stops, and
when you close the fridge, it will boost the fan to bring the temperature in range.
These are simple examples. In the stock market, algorithms are used to determine the best buy and sell prices and to detect circumstances in the past that might have the same effect in the future: let's call them Rules. These rules can be based on past research, Artificial Intelligence or Machine Learning. Our algorithms look not only at millions of pieces of price data but also so-called alternative data such as statistical data points and economic indicators.
Its all about statistics
The fact that we don't have trillionaires that own every stock in the world means that algorithms in finance are far from perfect, and nobody has discovered the Holy Grail. In algorithmic investing we strive to find ways to win more times than we lose (more than 50% winners) and make every win greater than any loss. So, if we win 51% of the time and a loss on average is 100$ and a win is 110$, we have succeeded.
That doesn't mean we won't lose sometimes, we will; it just means that statistically speaking, in most alternative universes, we should win. Some algorithms are known to win only 30% of the time, but if the losses are minimal, and the wins are big, they are still net positive. Unhedged steers clear of those! Too stressful!
Monitoring every position generates a sea of data
All stocks bought for the Unhedged Fund are monitored each trading day, every single minute. We observe price and volume and other data points and indicators, often referred to as Alternative Data. Ultimately our algorithms monitor more than 5.8 million data points every single trading day. That data gets enriched further during the night and in the morning, our programs recalculate and re-assess every decision that the algorithm has made. In an average year, our algorithms process more than 2 Trillion data points!
Each of our live algorithms has its specific universe of stocks and makes investments on a daily basis. The average holding time is 18 days, but that varies from 1 day to more than 400 days.
Links to related articles:
Algorithms at Unhedged
Investing in the US
Performance of Unhedged
Choose Investment Allocation
Updated on: 31 / 12 / 2021