Ex-Goldman Sachs Banker Starts Hedge Fund Analyzing Japanese Blog Traffic

[Andy Nguyen]

Former Goldman Sachs Group Inc. (GS) banker Hideki Furusho and a University of Tokyo professor have teamed up to create a hedge fund that invests in Nikkei 225 futures based on a computer model that analyzes Japanese blogs.

The Pluga AI Fund, which uses a web-mining model developed by Yutaka Matsuo, an associate professor at University of Tokyo, is aiming to raise 5 billion yen ($61 million) after starting with 30 million yen in August, said Furusho, the founder of Pluga Capital Co., which runs the fund. Pluga plans to target overseas investors starting from June, he said.

The fund, which targets annual returns of 30 percent, every day makes an investment decision to either buy, sell or not invest in Nikkei 225 futures based on the algorithm model, and closes its position at the end of trading by cashing out to maintain liquidity of the fund, Furusho said. The algorithm finds patterns between blog data and stock movements to form its investment decision.

“In an environment like this, investors are looking for liquidity as well as redemption requirements,” he said.

http://www.bloomberg.com/news/2011-...arts-hedge-fund-analyzing-japanese-blogs.html

 

[rishab dhar]

Just curious.

How do you start a hedge a fund?

 

[Tsotne]

Just curious.

How do you start a hedge a fund?

Read this:

http://www.moneyscience.com/Hedge_Fund_Tutorials/How_to_set_up_a_Hedge_Fund.html
http://www.vanityfair.com/business/features/2010/09/hedge-funders-201009

First one is more serious guide.

 

[rishab dhar]

Thanks.

I'll read it.

 

[Mr Doe]

Blogs are so last year, twitter is the new game in town, http://www.advancedtrading.com/articles/229502425?cid=nl_at_daily

 

[rishab dhar]

After reading about Hedge Funds that trade based on twitter or blogs, I but wonder "what if someone -let us say a group of spammers/hackers - spreads wrong news and that Hedge fund trades on that news, it could lead to a market meltdown in a matter of seconds (if these Hedge funds are indeed popular.)"

Are we closer to witnessing financial terrorism - Die Hard?

What measures do these funds take in order to avoid such a situation?

 

[Mr Doe]

...could lead to a market meltdown in a matter of seconds...

Why would you want that? Just front-run them (hft style). I better get my servers co-located in Folsom St., San Francisco.

 

[rishab dhar]

Yep. That would be the best; however, I believe the technology costs with be outrageous in this case.

Think about it

1) High costs associated with co-locating at a place where everyone wants to set-up.
2) High speed internet - 1 gbps and beyond .
3) High cost of electronic equipment.
4) Extremely low latency code.

Anyway, I was talking about the risks associated with building trading system that rely on social media for trading signals. The problem is that if any spammer spreads misinformation through twitter or blogs, it could lead to devastating results.

 

[Andy Nguyen]

Re your 1-4 points, it's a technology arm race out there so a lot of HFT is looking to Asia to build their shops there. See http://www.advancedtrading.com/infrastructure/229500005

Do you know the volume of message on Twitter daily? How much noise do you think 100 spammers can make?
there are a few things you can do to filter the weight of twitter messages for example. The more followers one account has, the more weight you can put on it. Fly-by-night spammers won't have 100K followers for examples.
You can use Klout (Twitter influence rating) as a filter as well.

 

[alain]

After reading about Hedge Funds that trade based on twitter or blogs, I but wonder "what if someone -let us say a group of spammers/hackers - spreads wrong news and that Hedge fund trades on that news, it could lead to a market meltdown in a matter of seconds (if these Hedge funds are indeed popular.)"

This has happened before and, guess what? No meltdown.

 

[rishab dhar]

I dunno. It depends. If they programs to do that for that "creating multiple accounts from large number of proxy addresses who are followers of each other."

Manually, of course they wouldn't be able to do much. But let us say if a group world's best 100 hackers wanted to cause a financial meltdown, in order to profit from it -because they know that others will trade on this information, they could do a lot. They could even compromise twitter.

 

[Andy Nguyen]

There is no need to go through that length to cause a financial meltdown. They can just hack into stock exchanges and cause major damages.
Wait, they did
http://online.wsj.com/article/SB10001424052748704709304576124502351634690.html
http://www.reuters.com/article/2011/02/08/us-sec-hacking-idUSTRE7173VS20110208

 

[rishab dhar]

@ Andy

Thanks for the awesome articles.

 

[Mr Doe]

There actually no reason to try to hack into exchanges when you can do much better. High frequency traders, trying to shave of a few picoseconds, don't really care that much about security. Naturally, all those front-running and volume churning algos cant really wait for the messages to get encrypted. There should have been any interesting presentation at BH 2010, if there weren't for high profile bank pulling the plug. HFT just got a bit more secretive; from Forbes:

Just as important as what’s revealed each summer at the Black Hat hacker confab in Las Vegas may be what isn’t. Among the talks conspicuously absent from this year’s schedule: a presentation exposing security vulnerabilities in banks’ high-speed trading systems.

The talk, planned by security researchers Varun Uppal and Gyan Chawdhary, would have dealt with methods for hiding risky unauthorized trades in high-speed trading applications, as well as demonstrating a “sniffing” software tool capable of siphoning trading information to a faraway hacker to allow a high-tech form of real-time insider trading. But Uppal tells us that the talk has been cancelled after concerns were raised by a financial industry client of the security auditing firm he works for, Information Risk Management.
“One of our customers, a main Wall Street bank, wasn’t comfortable with what we were presenting,” says Uppal...

...Uppal had also planned to demonstrate a piece of spyware capable of monitoring information from programs that use the FIX protocol, or financial information exchange, to make high-speed trades. While security measures for FIX programs are available, Uppal says he’s audited firms that ignore them for convenience or speed. Uppal says that could allow a hacker to monitor a bank’s trades and make near-simultaneous ones, or even steal a bank’s unique trading algorithm. “We’ve seen many firms that transmit trades in clear text,” he says. “It’s just a matter of a dropping a sniffer and intercepting those programs.”

Full article: http://blogs.forbes.com/firewall/20...rading-hacks-pulled-from-security-conference/
BH 2007 presentation raising security issues about FIX protocol: https://www.blackhat.com/presentati...resentation/bh-usa-07-goldsmith_and_rauch.pdf

Anyone dare to comment on that?