In Search of the Sixth Sense

FC: That implies that at the core of this is information distribution.

Kurzweil: Certainly. Information affects people’s decision making and that affects people’s purchasing of securities. And we also see the effect of increasing interest in so-called quant investing. Quant stands for quantitative. The idea of investing using computers is called quant investing. So we can see some simple methods that worked five years ago that don’t work today because of the improved efficiency of the market. The arbitrage from the simpler methods has been rung out of the system. So we have our sophisticated pattern recognition model -- we don’t program it a priori with our preconceived ideas of how the market should work. It’s very much data driven, and it's building its models based on what it sees. But it has the ability to build sophisticated models of how financial data interacts with each other.

FC: I assume there are massive amounts of inputs.

Kurzweil: Anything that’s quantifiable. Certainly all of the tick data of market transactions, but also a lot of company fundamental data and economic data. Analyst opinions -- things we can quantify. It builds models, and the result is that it makes predictions. It’s constantly updating what securities will do in different time periods, ranging from hours to weeks. And the objective is not to be able to predict these things perfectly, but to predict them better than chance. And it turns out we can definitely predict these movements substantially better than chance. That puts us in the position of being the house in a casino. The odds are slightly in the casino’s favor. On any two or three rolls of the die, the casino may make or lose money, but over 50,000 bets, it reliably makes money because the odds are in its favor. Of course, the challenge for the casino business model is that the transactions are not free. It has to pay for the casino and the people that operate it. It’s what’s called trading friction; they have to make enough on each transaction to pay for the process. So we have the same issue. But the odds are in our favor because we can make predictions substantially better than chance. Our system places lots of bets. Each bet is fairly small relative to the size of the fund. Some transactions win; some lose. But more win than lose so the system makes money and it makes enough money to overcome trading friction. There’s different forms of trading friction: The actual transaction costs, the fees, slippage -- you go to buy a stock that’s supposed to be $50.30 and you end up paying $50.32 cents. That’s slippage. Recoil: if you try to make a really big transaction you’ll actually move the market. But our system works, we’ve been trading with real cash for 2.5 years. We make 80-90% annual gains. We plan to launch this year a hedge fund using our technique.

FC: What’s a very idealized idea of where this will be in five years?

Kurzweil: Our model is Renessaince. They make 45% a year and they manage $5 billion. They do it year after year. Last year they made $2.25 on $5 billion and they keep some of that as a fee and return the rest of those profits to the fund investors. Similar technology. That’s our model of success.

FC: Can it learn?

Kurzweil: Oh, it’s constantly learning.

FC: Your future will no doubt change or shock the system, society, business changes.

Kurzweil: These are gradual changes which are already underway. It’s not like nothing is going to happen and we’re suddenly going to wake up in 2025 to a different world. We get there a step at a time, and it's already started. We can already see the business models changing. It's not just one change. It's not just a case of a CEO who presides over a company that operates the same way year after year. Already companies need to reinvent themselves in order to succeed. There’s a shock when an industry resists changing its business model. The recording industry resisted changing its business model; they tried to keep the same business model that was around when my father was a kid. Selling an album with maybe only one or two songs that someone wants for a pretty expensive price. The bottom line is that industries have to change the structure of their business models. Very often it’s a new set of organizations that adopt a business model that’s consistent with disruptive change that displaces the old ones. But people aren’t necessarily going to keep the same jobs or careers for their whole life -- especially when we change the concept of the human life cycle.