Should you start a hedge fund in high school?

You can probably guess a short answer to this question. How about a long one? Well, read the whole damn article.

Martin Perl, a Nobel Prize laureate in physics, observes on his blog: " [...] occasional scanning of the obituaries in the New York Times indicates that financiers live longer than physicists, so perhaps start a hedge fund in high school."

Is it really feasible to start a hedge fund in high school or is Dr. Perl simply joking. I think it's definitely the latter.

Managing hedge funds is not, pardon my language, for punks. And I doubt it ever will be. Well, unless the punk is of the Terry Tao caliber when he was a high school student. A math child prodigy, that is. Otherwise, the road to the hedge fund trading class is much longer and in some cases it takes a formal education in math or science that extends well beyond the high school level.

You do not need to be a Ph.D. to make a good hedge fund manager, but being a Ph.D. in one of those fields can certainly give you a good deal of advantage. In fact, it can give you a totally unfair deal of advantage and there is plenty of evidence to back this statement. As a mere token of such evidence, let me offer you two good examples of math Ph.D.'s who have become excellent hedge fund managers.

One was mentioned by me in some detail in an article posted on this site last year. His name is Ed Thorp and if it were not for Jack Schwager's latest Market Wizards sequel, (Hedge Fund Market Wizards), the trading community at large, especially its younger members, might have never heard about him unlike the gambling crowd where he has made his name as the first person to "beat the dealer" in blackjack. And that's just for starters.

Another one is Jim Simons, a billionaire, who made his fortune as a hedge fund manager after quitting a distinguished academic career. In fact, I first heard this name in connection with the Chern-Simons form, a term any theoretical physicist interested in geometrical aspects of modern physics is bound to come across sooner or later as did I as a graduate student. It was only many years later, certainly a decade if not closer to two, that I came to realize that this very Jim Simons was also a famous hedge fund manager. For more about Dr. James Harris Simons, I recommend his Wikipedia page.

This list could go on and on. Allow me to throw in two more names with colorful biographies, who, like the other two have their Wikipedia pages serving more information about their achievements in the academic and trading worlds. These two people are mutual friends and physicists.

They are the founders of the Prediction Company, a trading entity that is now part of a Swiss bank UBS AG. They have been featured in many articles and in some books. They are Doyne Farmer and Norman Packard. Not surprisingly perhaps, like Ed Thorp, they too are known for their gambling exploits. These exploits have been documented in a book The Eudaemonic Pie, that I highly recommend your attention if you are into this type of stories.

You can sometimes come across comments that insinuate that Ph.D.'s (or smart people, in general) are somehow unlikely to be good traders. In other words, that intelligence is somehow negatively correlated with a trading talent or the ability to extract the money from the markets. I find it rather hard to understand why would anyone think so, to put it mildly. To put it more forcefully, it takes a total loony to make claims like that.

It makes no sense on a purely intellectual level, but if you consider that comments like that often appear on trading forums, you can probably guess that the word "intellect" (or its derivatives, for that matter) has very little to do with it. It's simply yet another manifestation of bizarro-thinking, not so uncommon among the type most likely to engage in dumb gambling, trading or investing, than anything else. The type that enjoys living in its own smog of self-delusion and insists on funding the financial markets with its dedication to ignorance. Since such people dominate most of the trading forums, the fastest way to cut your IQ in half is to join one of them. One of the trading forums, that is.

Would you like to know how the famous Turtles, a group of commodity traders, were selected? Well, according to the youngest of them, high intelligence played an important role in this selection.

The Turtle traders selection criteria according to the youngest of them.

Turtles came from all walks of life. And they did pretty well, if you know their story, so perhaps it makes sense to protect your IQ from deterioration. Intelligence is not the same as formal education, although better educated people typically have higher intelligence, which has to do with the fact that intelligence is not entirely innate. It can grow in the right circumstances, so surround yourself with those who value it and not with those who might stifle it.

Perhaps the best way to illustrate the difference in the trading abilities between the people like Jim Simons or Ed Thorp and your typical trading forum member is by way of analogy. Let me offer you such an analogy. I will do this by stealing it from Dr. Neil deGrasse Tyson, another scientist, but not a trader, to the best of my knowledge. In the video that follows, that is worth watching in its entirety, this analogy starts around 7:35.

I once spent about a year in the company of chimps on some trading forum that was probably better than most and definitely much better than some of the newer ones that cater to the dumber chimps. It took me less than a couple months to figure out that they were chimps. The best take some of those dumber chimps can produce on my trades is that they are "too good to be true." Having studied the chimps for a year, I do know their limitations quite well. That's indeed what most of the chimps will ever be able to produce in this matter, the very rare exceptions of chimp geniuses notwithstanding.

All of the Ph.D. traders mentioned above are these days called quants for they rely in their trading on the heavy math (proprietary quantitative tools) that mere mortals have no access to. The word "quant" is still relatively new and it probably did not even exist when Ed Thorp was starting his career as a hedge fund manager. There are no chimp quants.

Posted on February 11th, 2013. Last revised on March 10th, 2013.