Infinitary Connections #10 - QuantMinds International in London
The Bridge Method - A New Data Analytics Technique
Welcome to the tenth issue of the Infinitary Connections, the official Substack of the Infinitary Fund. This is a newsletter where Nic and I will be sharing some of our insights across the world of finance, economics, technology, and more. As partners in the Infinitary Fund, we have a unique perspective on the world, the markets, and the shape of things to come.
Disclosure: This article does not contain investment advice or solicitation to invest and should not be construed as such.
This past week in London we shared the speaker stage with some of the brightest minds in the quant world at QuantMinds International. This conference was a gathering of all things quant, with people searching for the most cutting-edge research and meeting the top minds in the field, both academic and corporate. Truly a place to test your meddle with new ideas.
In this article, we want to share a bit of what our talk was all about: our proprietary investment strategy called the Bridge Method.
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Let’s dive in.
Infinitary Fund Overview
Infinitary Fund is an investment advisory business. Clients invest their money with us in the hopes of meeting their financial goals. Our fund invests specifically into S&P 500 equities. with a buy-and-hold method (no leverage). We then hold on to the stocks for at least 1 year before we sell, which is highly unorthodox in the quant world. Our input is strictly S&P 500 daily price data for all of the stocks in the index.
We’ve been operating successfully for almost 5 years as of this upcoming January.
Our investing method rests upon new mathematics that we’ve created, which was molded into a strategy dubbed the “Bridge Method”. This is what we were invited to discuss at QuantMinds International.
The Bridge Method
The Bridge Method is a new type of data analytics technique that we invented for the purpose of investing into stocks. The approach is predicated on throwing out the orthodoxical kits of tools that are typically available to quants via machine learning and statistics. When considering “alternative mathematics”, one can find a whole new world of insights at their disposal, thus giving them an edge in areas involving analytics.
In our view, the mathematical foundations that comprise statistics and machine learning are outdated and ineffective in an environment as complex as the stock market.
These fields are grounded in using historical data for outputs that involve “linear progression”, or in other words, “linear transformation”. This is when you have a formula where proportional changes in inputs cause expected changes in the outputs.
Linear Progression Model in the Form of Regression: Image Credit
This is where the Bridge Method comes in. For our method we have conducted research in the following fields, which sets us apart from the entire investment industry:
Homotopy Type Theory
Knot Theory
Complex Adaptive Systems
Homotopy Type Theory
Our method utilizes the most cutting-edge updates in mathematical foundations, with the broader foundation being grounded in something called Homotopy Type Theory (HoTT). This is an update to the traditional idea of “Sets” that one might study in a statistics or calc course. HoTT is only about 10 years old, which is incredibly new for the math world.
Homotopy Type Theory (HoTT) is a fancy way of describing how things can be considered functionally equivalent in a flexible manner. It's like saying two shapes are the same as long as you can continuously morph one into the other.
Functional Equivalence, a term borrowed from ecology, means that multiple species can fulfill similar, if not identical, roles in the ecosystem that they operate within.
In our context, it's crucial because we're not stuck thinking of market elements in rigid, fixed boxes. Functional equivalence means different aspects of the market—like stock volume or P/E ratios—can be treated as practically the same if they behave similarly, providing a more dynamic and nuanced view. So, instead of relying on static categories, HoTT lets us see the market as a continuously shifting landscape where seemingly different things can act alike, a perspective vital for spotting emerging patterns and predicting market dynamics more accurately.
Knot Theory
Another mathematical discipline we utilize is called Knot Theory.
Different Types of Knots: Image Credit
Knot theory is like analyzing the twists and turns of a complex tapestry pattern. In the market, it's about understanding how relationships between different actors (stocks, sellers, buyers), represented as knots, persist despite changes. Just as a knot in a rope remains a knot even if you stretch or bend the rope, certain relationships in the market endure despite fluctuations. This perspective gives us a unique way of grasping information flow and provides a way to maintain our investment course amid market changes. It's a bit like navigating through twists and turns in a labyrinth, where the structure, or knot, helps us predict how things might unfold in the market.
Incorporating mathematics from knot theory allows us to determine the strength and quality of the relationships between all actors. Imagine a dance floor where each stock is a dancer; knot theory helps us understand not just the moves of each dancer but also how their movements create mesmerizing patterns on the dance floor. These patterns represent emergent behaviors, like sudden shifts in rhythm, that you might miss by merely watching one dancer. By delving into this mathematical dance, we gain insights into the interconnected dynamics of the market. This gives us partial causality in our models, which aids in making robust predictions.
Analyzing the market as a geometric structure, with knots, allows us to discover topological properties of the relationships. These insights inform our decision to keep investments long-term, despite changing market dynamics.
Complex Adaptive Systems and Emergence
Complex adaptive systems, in simple terms, are like ecosystems where various components interact in intricate ways, adapting to each other and their environment. Think of it as a diverse, interconnected jungle where each species influences and responds to others. In the stock market, this perspective helps us see beyond linear predictions. Traditional models assume a straightforward cause-and-effect relationship, but complex adaptive systems acknowledge the market's inherent complexity. It's understanding that emergent properties, unforeseen dynamics resulting from the interactions of various market factors, can significantly impact stock behavior.
The study of complex adaptive systems influences our strategy because what we’re looking for as part of our investment criteria are emergent properties within the price data.
Emergence can happen in organic and non-organic areas. One of the most commonly referenced emergent patterns involves snowflakes. Each snowflake's specific shape emerges in response to the dynamic conditions it encounters during its descent, creating a diversity of patterns. This complexity and novelty in the structure of snowflakes exemplify emergent phenomena, where the collective behavior of individual components (water molecules) leads to the creation of something more elaborate and unpredictable.
The Result
In the grand ecosystem of the market, our strategy unravels a captivating narrative, Bridging together Homotopy Type Theory, Knot Theory, and the principles of Complex Adaptive Systems.
It's not just about predicting stock movements; it's about decoding the language of emergent patterns and functional equivalence that come from the collective human psychology of the market.
While traditional models tread the linear path, we are able to decrypt what appears to be the chaos of the market, discovering hidden knots and understanding the dynamic interplay that defies conventional wisdom. At the end of the day, the stock market is complex ecosystem of human interactions, which makes it inherently predictable.
Welcome to the Bridge Method, where we don't just follow trends; we decipher the market's unique language to stay ahead of the curve.