The Two Fathers of Quants: Donald Sussman and D.E. Shaw

Early Computer: Commodore 64.

The birth of stock trading based on computer modeling is an interesting, if not so well-known story. It begins in 1988, when 37-year-old David E. Shaw phoned hedge fund manager Donald Sussman.

Shaw was a Californian who had a Ph.D. from Stanford University and had formerly been a computer science professor at Columbia University, but was now working for the giant investment bank Morgan Stanley. Shaw wanted to talk to Sussman about his new-found career on Wall Street. Shaw had just been offered a new job at Goldman Sachs, one of Morgan Stanley’s chief competitors, and wanted advice from Sussman about what to do.

Back in the late 1980s Wall Street and computers did not mix. What Shaw was doing at Morgan Stanley was brand new, and was even kept as a company secret. Shaw needed Sussman’s advice about what his next move should be: stay at Morgan Stanley;  move to Goldman Sachs; or perhaps there was a third option?

Donald Sussman, the founder of Paloma Partners, was intrigued by Shaw. He was an expert in recognizing and financing hedge-fund talent. He became excited by what Shaw told him about the potential for computer technology to revolutionize the finance industry. Shaw’s ideas not only eventually led to the transformation of the culture of Wall Street, but also led directly to the development of on-line retailing, paving the way for such successful ventures as Amazon.

In 1988, at the birth of this brave new world, Shaw just told Sussman, “I think I can use technology to trade securities.”

Sussman was not impressed with the Goldman offer. He told Shaw: “If you’re confident this idea is going to work, you should come work for me.”

During a three-day cruise around Long Island Sound on Sussman’s 45-foot boat Shaw and his partner, Peter Laventhol convinced Sussman that their idea had great potential.

Sussman recalls that the pair “convinced me they believed they could generate models that would identify portfolios that would be market-neutral and able to outperform others.” In other words, the plan had the potential to make a lot of money with minimal risk.

Sussman’s Paloma Partners invested $30 million with D.E. Shaw. Since that moment in history the company flowered into a $47 billion firm, earning its investors over $25 billion as of 2016. The company made millionaires out of many employees and David Shaw into a billionaire.

Today, because of the genius of David Shaw and the vision of Donald Sussman, the quantitative revolution has become the most wide-spread trend on Wall Street, and especially in hedge fund investing, managing $500 million of the industry’s $3 trillion in assets. Seven of the ten best performing funds are “quants,” including, of course, D.E. Shaw. Not surprisingly, one of those other seven, Two Sigma, was launched by former D.E. Shaw employees.

The world of finance, retail and more, owe quite a bit to these two pioneers, Donald Sussman and David Shaw.

President Trump to Present a $1.5 Trillion Infrastructure Plan

Fulfilling one of his campaign promises, US President Donald Trump will uncover his plan for rebuilding the country’s infrastructure this week. The plan will cost US taxpayers $1.5 trillion, but is heavily dependent on state and local funding sources.

The plan will centerpiece a $200 billion pledge from the federal government which will be used to leverage money from cities and state budgets which will earmark them to roads, highways, ports, airports and more.

“Every federal dollar should be leveraged by partnering with state and local governments and — where appropriate — tapping into private sector investment to permanently fix the infrastructure deficit,” Trump said at last month’s State of the Union address.

Trump has said many times that the deteriorating roads and highways are holding the country back from faster expansion of the economy. Some lawmakers and others say that this issue should have been dealt with last year and Trump’s first big push in Congress, instead of the health care issue. Infrastructure is a bipartisan issue that would have helped create a more unified Congress.

The plan was previewed by administration officials as containing two key components: funding for new investments which will help speed up repairs on crumbling roads and airports; and a more efficient way for projects to get the permits they need, so projects can get underway faster. The officials added that the $200 million will come from cuts in other programs.

Exxon Investing $50 billion in US Business

Darren Woods, CEO and Chairman of Exon Mobil, said last week that his company will be investing about $50 billion in the development of the US oil business over the next 5 years.

Woods said that Exxon is able to make such an investment due to the company’s strength and because of the recently-passed tax law which will slash corporate tax in the USA.

The money will be used to boost oil production in Texas and New Mexico, and to build new manufacturing facilities.

Woods added that the investments are good quality for shareholders which are made even better by the new tax landscape.

Many business leaders have come out in favor of the tax reform plan, which lowers corporate taxes from 35% down to 21%. Republicans were especially happy with the law, saying it will fuel growth and create more jobs. Democrats are not as pleased, saying the reforms favor the rich and expands the federal budget deficit.

Alibaba & Malaysia Forming an Interesting Partnership

Last year, Alibaba founder Jack Ma and Malaysian Prime Minister Najib Razak launched an “e-hub” facility. One of their goals was to remove trade barriers for smaller locations and emerging nations. Now, Alibaba plans to set up a traffic control system that would use artificial intelligence for Kuala Lumpur. This would be their first time offering a service of this sort outside of China.

They plan to make live traffic predictions and recommendations by looking at the data they collect from video footage, traffic bureaus, public transportation systems and other locations. The technology will be integrated into 500 inner city cameras by May and Alibaba will work with the state agency Malaysia Digital Economy Corporation (MDEC) and the Kuala Lumpur city council to implement these changes.

A similar system in the Chinese city of Hagnzhou has reported traffic violations with as much as 92% accuracy, an increase in traffic speed of 15%, and an ability for emergency personnel to reach their destinations in half the previous time.

 

 

Italian Confectioner Ferrero Buys Nestle USA

Photo courtesy of Avelinak

After considering several buyers for its US chocolate business, food giant Nestle picked the Italian luxury chocolate brand, Ferrero in a deal worth about $2.5 billion. Last week it was reported that Ferrero had outbid its rival Hershey for the prize.

The deal makes Ferrero the third largest chocolate company in the US, after Mars, Inc. and Hershey. Before the buyout, Ferrero was the fifth largest confectioner, but only controlled 3% of the market. The Hershey group had 31.5% of the industry and Mars with 27.1%.

Ferrero also makes Ferrero Rocher pralines and Kinder chocolate eggs. It was founded in 1946, in the small Italian town of Alba, in Piedmont, by the grandfather of the present CEO, Giovanni Ferrero.

In 2011, after the death of his brother, Giovanni became the sole CEO of the company. Until that point the business grew solely through internal growth. After that the company started growing through acquisitions of other companies.