A Terminator Hunts For Idio

Moontower Munchies #40

Nov 22, 2023

Friends,

I just started reading Advanced Portfolio Management by Giuseppe Paleologo.

About the author

He’s on garden leave after running risk at Hudson River Trading. He has also held senior positions at Millennium, Citadel, Axioma, and IBM Research. He was formerly a mathematical researcher at Stanford and an instructor in the master's program in Financial Engineering at Cornell University.

I started reading this book because I was interested in how fundamental investors think about risk and performance attribution. I heard the book was standard issue at Citadel for pod PMs. I haven’t verified that but I did notice that Brett Caughran strongly recommended it in his terrific 5 THINGS I WISH I KNEW AS A FIRST TIME HEDGE FUND PORTFOLIO MANAGER thread.

The first 2 chapters are brief background info. Chapter 3 starts the journey. My notes (which are intended to be references for me as opposed to “study notes”):

Chapter 3: A tour of risk and performance

Alpha is the expected value of the idiosyncratic return and epsilon is the noise masking it.
- There's general agreement that accurately forecasting market returns is very difficult or at least not the mandate of a fundamental analyst. A macro investor may have an edge in forecasting the market, but the fundamental one does not have a differentiated view.
- The job of the fundamental investor is to estimate alpha accurately
- The risk manager’s job is to estimate beta and identify the correct benchmark
The error around an alpha estimate is larger than that alpha estimate itself. This is not true for beta. You cannot observe alpha directly and you cannot estimate it from a time series of returns. The fundamental analyst predicts forward-looking alphas based on deep research. The ability to combine these alpha forecasts from a variety of sources and process a large number of unstructured data is a competitive advantage of the fundamental investor.
The chapter decomposes alpha(idio) and beta contribution and risks
- Kris: found this helpful for understanding portfolio alpha even though I’ve covered this all before in https://moontowermeta.com/from-capm-to-hedging/ from my own experience.
  
  This is my take:
  - What the industry calls “idio”, I refer to as “risk remaining”. Same exact concept.
  - If X = market and Y = stock then this identity decomposes the risk:
    - Stock variance = Market variance + Idio variance
      
      Var (Y) = R² * (VarY/VarX) + (1-R²) * (VarY/VarX)
      Note that market variance is Beta² so:
      Beta = R * (σᵧ /σₓ )
  - Risk remaining or idio is a non-linear function of correlation. As correlation drops, idio explodes. Once R is .86 or lower the idio risk exceeds the market risk!

Fyi, It’s a short book, 168 pages plus appendices.

We finished the first 2 Terminators. It was a lot of fun to revisit some of my favorite movies with the boys who were at the edge of their seats.

We watched the special edition extended version of T2 which you should check out if you are a fan for the deleted scenes (anthology of deleted and alternate scenes from Hope Of The Future).

Some of my favorite deleted cuts (including the YouTube links):

The dog Max scene
From GPT: In this scene, the T-1000 goes to the Voight's backyard, kills Max (the dog), and then realizes he's been tricked. This scene was cut as it was deemed unnecessary. Much of the T-1000's tracking of John is implied by the Terminator's own tracking, as each Terminator can anticipate each other's moves.
Smile
From GPT: John tries to teach the Terminator how to smile. This scene, filmed at a roadside stand, was one of the funniest moments in the film but was cut due to its length and the difficulty in editing it down. The film's focus on maintaining the forward movement of the story took precedence over this humorous scene.
Weapons cache
From HopeOfTheFuture: The majority of the dialogue in this scene, specifically the discussion about fear and functionality, was omitted as it was unnecessary to the plot flow. John's first line is heard over Terminator's uncovering and lifting of the minigun. The Terminator grins for the first time in this scene as he holds the minigun and looks at John. Even though the "smile" scene at the roadside stand was omitted, this moment plays as a big laugh and feels appropriate, as if a large weapon is exactly what a Terminator would smile about.

Short on time…these are the ones you can’t miss:

Night repairs
According to ScreenCrush: The Most Scene In Terminator History Is This Deleted One. Decide for yourself.
Dyson
From HopeOfTheFuture: Another significant element from the film, the introduction scene at the Dyson house, not only developed the family aspect of Dyson's life but also fleshed out his character as an obsessed scientist. He was caught blindly in the thrilling obsession of discovery without acknowledging the dangerous ramifications of his work. The omission of this scene for time constraints simplified the character but actually made the later disruption of the family by Sarah more potent. We infer that Dyson's relationship with his family was close and idyllic rather than somewhat neglectful, as this scene portrays. Fortunately, the essence of Dyson's character remains intact in Joe Morton's performance.
Sarah stalks Dyson’s house before attempting the assassination
From HopeOfTheFuture: In the final film, all of Sarah's preparations outside the Dyson house (Scene 129, 130, etc.) have been removed; it is much more ominous to focus on the Dyson family happily at home and then introduce the red dot of Sarah's laser designator appearing out of nowhere on Dyson's back. The shock of seeing the dot appear plays better than crosscutting Sarah as a terminator --the first time we see her here, she's already set up as an assassin. The final cut of this Dyson house sequence also compensates for the omission of the earlier Dyson scenes by not only retaining the essence of his character --a man obsessed with his work even at home-- but also establishing just enough of the normal everyday family routine for the audience to relate to and sympathize with just prior to shattering it.

I gotta say… it’s pretty hard to not map Sarah Connor to OpenAI’s board and Sam Altman to Dyson.

Ya know, except for the minor differences that Sarah knows the future and the board looks…out of their depth? (Link via

Rohit Krishnan

— Rohit is an IRL friend that I met on the internet — he’s got a new book out, Building God. This post explains the premise of the book and how AI fills in a gap in interoperability that he frames as “soft API”. It’s a frame I hadn’t considered in thinking about how AI extends our abilities.)

Stay groovy ☮️

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