Investing Lessons From the Top of a $7.3 Billion Quant Fund
(Bloomberg Markets) -- Igor Tulchinsky laid the groundwork for WorldQuant LLC, a $7.3 billion quantitative hedge fund with more than 700 employees, while working for Izzy Englander’s Millennium Management LLC. The 52-year-old native of Belarus now provides a rare look at how he built WorldQuant in his book, The UnRules: Man, Machines and the Quest to Master Markets (Wiley, Sept. 24, 2018). Here Tulchinsky discusses his unconventional upbringing, his debt to Karl Popper, and his decision to turn WorldQuant into a “factory” that employs 140 Ph.D.s in more than 25 offices in 15 countries in the firm’s quest for 100 million alphas, or insights.
You fled the Soviet Union at age 10 with your parents and lived in a cockroach-infested hotel in Manhattan. You worked odd jobs, such as washing dishes in Wichita. How did your youth shape you?
My youth taught me to take risks and to remain an optimist, because few things are riskier than emigrating from the former Soviet Union. These experiences also taught me that nothing is ever as bad or as good as it seems. They gave me an obstacle early in life that had to be overcome. I developed a strong drive, a broader perspective, and an ability to break limits and live with uncertainty.
At 17, you began developing video games. How did that change the course of your life?
Being a video-game programmer was my introduction to simulation, which, as I write in The UnRules, is what WorldQuant is built on. After that, whenever I had a problem to solve, I would simulate it. Developing video games also provided me with a platform to express my creativity and showed me an early model for success. I have used this ability throughout my life, culminating at WorldQuant, where we do billions of simulations per month.
Early in your career at Millennium, Russia defaulted. You lost your gains for the year. But Izzy Englander didn’t fire you. Why?
Because I had two strategies. One of the strategies was decimated by the Russian crisis. The other strategy was barely touched. So I was able to simply cut the strategy responsible for the losses and continue with the more robust one. I had dug myself into a hole, but there was a clear way out.
You now stress the importance of reacting instantly to bad news, cutting losses and moving on. “If it’s scary, run.” What scares you in today’s markets?
From my quant perspective, things are looking less scary than ever. The key is diversification. Most scary things are not so scary if they are a tiny fraction of your portfolio.
This has been a tough year for many quants. Are there just too many chasing the same thing?
Quants are actually a very diverse group. There are good quants, and there are bad quants. There tend to be more bad quants than good quants—bad in the sense that they are still doing things from 10 years ago. So they wind up correlated and underperforming as they tend to step on one another’s toes.
All theories and methods are flawed, you write, so investors must constantly adapt when trouble arises. What do you say to the money-losing discretionary managers who are sticking to their guns in the belief that markets will eventually turn their way?
Many discretionary strategies, by nature and by virtue of their concentration, have very high volatility, so it’s normal for them to experience large drawdowns. As long as something is normal, it shouldn’t be scary; sticking to your guns is the correct thing to do. But when losses become abnormally high, it’s time to reconsider your trade.
WorldQuant has become an “alpha factory,” producing millions of algorithms to understand markets. Yet you’ve made decisions to liquidate partly by “observing the fear in people’s eyes.” How important is intuition, and when do your quants use it?
Intuition is important when it predicts the future better than your models do. The more models you have and the better the models are, the less you need to rely on intuition. Today at WorldQuant, we have millions of alpha signals, so we don’t need to use intuition very much. That’s the goal.
It makes sense that a kid from Belarus who taught himself to write code would find talent in unlikely places, like Vietnam and Bulgaria. How do these quants differ from those trained at the likes of MIT?
Every country has a different educational system and culture, so people think differently. And different thinking is valuable because it provides different signals and contributes significantly to our diversification as a firm. In Vietnam and Bulgaria, people approach problems differently than they do here—not better, not worse, just differently. The differences are gold.
You write about scientific ideas that have influenced you. Name one scientist or mathematician whom every quant should study.
Karl Popper is responsible for the thesis that all theories and hypotheses are flawed. This single statement leads to the central idea in this book—the UnRule—and to the concepts of cutting losses, extreme diversification of ideas, and 100 million alphas.
Scientists and quants alike search for order in chaos. But the deeper they probe, you write, reality becomes “spooky strange.” What’s the strangest thing you’ve observed about markets?
The market is an extremely complex beast—that it can be modeled only by an ever-increasing number of alphas is a testament to that. And as the number of signals goes up, any individual signal makes less and less sense. It’s purely empirical. We can model the market but never fully understand it.
Science has entered the Age of Prediction, you say, because of Big Data and AI. So in 10 or so years, what will quants be able to predict about markets?
Quants historically have predicted only one thing: prices. In 10 years quants will still be predicting prices, but it will take more and more data, computing power, and algorithms to accomplish what we do today. Quants armed with these resources will continue to do well; markets will appear less and less predictable to everyone else.
In addition to running WorldQuant, you’ve started an online university, given millions for medical research, and written a memoir. What’s next?
Applying our forecasting processes and methods to sectors outside of finance. I’m very excited about the opportunity for prediction.
The most personal story you tell is that of your father, a professional musician, who became a master violin maker. What imprint has he left on you?
Simply to never stop.
What do you want readers to know about WorldQuant that they probably don’t already know?
That we have some employees who have named their children Alpha. That’s real dedication.
Bielski is a senior editor on the investing team at Bloomberg News in New York.
©2018 Bloomberg L.P.