How can Renaissance Technologies make so much money from financial markets by hiring scientists/mathematicians with no domain knowledge of finance? originally appeared on Quora - the place to gain and share knowledge, empowering people to learn from others and better understand the world.

Answer by Justin Medlin, Active investor, Founding member of Systematic-Traders.com, on Quora:

Renaissance Technologies stands alone in my opinion as the king of the hill when it comes to the uncovering of very real predictive edge in the markets.

The only way to attain this predictive edge is through a masterful collection, structuring, and analysis of data, on an industrial scale, and in an exacting and scientific manner.

The more we develop our own quantitative framework to attempt just this very thing, in our case to develop systematic/automated trading strategies, the more we realize that what we're creating is not a purely markets-based predictive structure, suitable only for the wresting of some amount of 'edge' from financial markets, but rather a generalized predictive structure, applicable to almost anything for which there is a large amount of historical precedent/data, and at least some small element of pattern or structure within the data.

Looking into RenTech, one of the first things that struck me is their interest in individuals that had worked on software and database structures geared towards language, language structure, specifically with regards to the ability to predict what someone is saying (or trying to say). I noticed what looked to be the aggressive recruitment of the biggest names in this field.

Think about it for a moment... if someone had created a powerful mathematical methodology that helped them predict the likely next word (or two, or three) in a sentence that's being typed, lets say for usage in smart-phone technology, how big of a leap is it from here to the prediction of the next bar of data in a given price series?

Think of a price chart as a story being told, with each successive bar of price data being an additional word in this story, and it should become clearer. At each given moment in time, the current bar of data represents the middle of a sentence or paragraph (or, better yet, an entire book). The same broad-level mathematical predictive structures could be used in both cases, with stunning efficacy (relative to the norm, or relative to random). There's certainly more noise in the markets relative to our common use of language, and vastly less consistent and quantifiable structure... but there is some hint of underlying structure and pattern and consistency, for those who have eyes (and the proper tools, and processing power) to see... and RenTech certainly has all of the above.

When you become a reductionist in your market perspective, and boil speculation down to its simplest and most powerful basic principles, you begin to see it as directly analogous to seemingly unrelated or abstract disciplines. . . I tend to think it was only a matter of time before the best and the brightest (RenTech) realized this, and that they could make use of (and built upon) some already extant predictive frameworks, to profoundly cost-efficient and time-efficient effect.

A testament to the power of analogous thinking, and the creative and competitive spirit over at Renaissance Tech... and one of the foremost reasons we use them as our model, our ideal, as we make our own progress in the never ending battle to wrest edge from the markets, which remain the most complicated and multifaceted math/logic problem in the modern world.

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