Third, slow it down. If you can slow down the investment decision process, you start to regain an edge over algorithms. This is not least due to the fact that in the short time scale, the best way to win over a machine is to use a machine. If you can do this with the assistance of your own algorithms, even better. As is true in the game of chess, the best combination of intelligence is human plus machine – known as augmented intelligence and what beat Deep Blue, at least the first time, until the machine was upgraded. If you don’t have one, stay away from short term trading!
Finally, think outside the box. Most algorithms today been through a period of sustained rising yields or rising volatilities. When that happens, it will take time for the machines and their designers to adjust, especially since these kind of shocks in the bond markets have not happened for a very long time. We are probably getting close to that inflection point, and when that happens, you will get a great shot at winning…for a short while, at least. Alas, the designers, and the machines will also learn, and we will be back to where we started when they come back with their upgraded versions. We just have to get used to it.
On to the next sequel of Terminator.
How to Beat the Machines Before They Beat You, Forbes
Vineer Bhansali, Ph.D. is the Founder and Chief Investment Officer of LongTail Alpha, LLC, a California-registered investment adviser and a CFTC-registered CTA and CPO. Any opinions or views expressed by Dr. Bhansali are solely those of Dr. Bhansali and do not necessarily reflect the opinions or views of LongTail Alpha, LLC or any of its affiliates (collectively, “LongTail Alpha”), or any other associated persons of LongTail Alpha. You should not treat any opinion expressed by Dr. Bhansali as investment advice or as a recommendation to make an investment in any particular investment strategy or investment product. Dr. Bhansali’s opinions and commentaries are based upon information he considers credible, but which may not constitute research by LongTail Alpha. Dr. Bhansali does not warrant the completeness or accuracy of the information upon which his opinions or commentaries are based.