Factors: Science Meets Chaos
2/05/2025
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JLK: Founder / CIO
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Experience
Issachar Technologies
(2022) Founder / CIO
Adage Capital Management (TMT)
Market Data
(2015-2022) Public & Private
Experience Science
Balyasny Asset Management (TMT)
(2014-2015) Public
SAC Capital Advisors (TMT)
(2012-2014) Public
Jared Kubin Harvard Business School
(2011-2013) 3x TECH
Founder Data Recovery Software Company (Founder)
Entrepreneur
(2008-2011)
Harvard Business School Distributed Database Software Company (Co-Founder)
University of Florida (2006-2011)
Remember Two Things
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Averages are irrelevant… History is Bounded:
Markets live in the tails the Future is INFINITE
& careers are made there
Markets Don’t Play by Gaussian Rules
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QUESTION
How can the finite
understand the infinite?
COMPLEX SYSTEM: Markets are ALIVE ( “Machine”)
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1 Interdependence & Feedback Loops
1. Shock Waves
2. Momentum Tops & Fear Sells Offs
2 Non-linearity
1. Small Changes HUGE impacts
2. Markets LIVE in the tails
3 Emergence & Adaptability
1. Non predictive behaviors : bubbles
2. Every changing rules and incentives
STATIC MODELS FAILS
BECAUSE MARKETS
ELOVE FASTER THAN
MODELS CAN ADJUST
Dichotomy of a Risk “Taker”: Science Meets Chaos
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Edge vs Risk & Uncertainty Past vs The Future What to Neutralize?
DOLLAR FACTOR
BETA NEUTRAL!!!
Differentiated
Business View of
Acting Future
Better
• What are you good at? • Biz Model: 6-10x Leverage • What risks can you live with?
• Can you see around corners? • Reality: Neg Alpha in sizing/timing • Risk is non-linear
• When you can’t.. Can you hedge?
What is a Factor?
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Any attribute that can be grouped together
Definition and measured over a period of time
Top-Down Factors (Descriptors or States of Being)
• Size: Large-cap vs. small-cap
• Valuation: High P/E vs. low P/E stocks
• Volatility: High-beta vs. low-beta stocks
• Growth vs. Value: Companies with high growth potential vs.
those with undervalued metrics
Causal Alpha Factors (Drivers of Change or Action)
• Earnings Revisions: Upgrades or downgrades in earnings estimates
• Sales Growth: Acceleration or deceleration in revenue
• Economic Data: Changes in unemployment, inflation, or GDP growth
• Monetary Policy: Interest rate changes or central bank interventions
“Idio”: Factor Abstraction
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What is “IDIO” → I don’t believe in most textbook definitions
• Textbooks will tell you its “what is left over” ...
How does that help manage risk?
• Idio is REALLY two things:
Event Risk
&
Undiscovered Factors
(by you and not someone else)
All investors are FACTOR investors
3 Main Attributes: Useful vs Interpretable vs “Correct”
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Global Statistical Custom
Factor Model Model Model
• Relationships break in
stress → right when you
Easy to Build Hard to Build Expensive need models the most
Not Useful Hard to Interpret Hard to Build
Hard to take Action Hard to take Action Hard to Iterate Fast • Non-linear world (small
Risk Teams love Math/DS love PMs love
changes = BIG impacts)
• Event Risk (why clip?)
• Factors with limited data (AI)
• IPOs
• Universe / Security Master
*Hard to Interpret • Not detailed enough changes (engineering problem)
• “AI POWER”
*End of Day → How do I fix?*
Markets Don’t Care about your Models: DEEPSEEK & Tariffs
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• Typically modeled to explain past
returns and NOT on future returns
• Wrong BETAs kill
− Time periods matter
− Method matters
• Correlations break down in HIGH VOL
• IF Analysis is correct? BIG IF … what
do you do now?
“winsorize”
• Outlier moves can end your career
• Monday 1/27/25 one example
• Historically bad day for HFs
• Global Factors give you false sense of
precision
Issachar Approach: Little innovation -> Big Change Coming
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Biggest Fear as a Risk Manager is HIDDEN FACTOR BETS
GOAL: Custom Factors + Statistical Model for Risk Breakdown
USEFUL INTERPRETABLE
MATHEMATICALLY
CORRECT
The Future: AI “Early Warning Systems”
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Chat UI replaces EXCEL / Panda & SQL
Macro Sentiment Pro-Active Rec’s
Fundamentals Regimes
Greatest Time in HISTORY to be an Investor
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1 2 3
Markets are alive →
All investors are “factor” No “historical” Factor
nothing is normal →
investors ->choose how to model can compete with
careers are made
compete a good forecast
in the tails
4 5
What Factor Model
will understand No Risk No ‘Rari
President Trump?
JLK@[Link]
@JaredKubin
