Ensemble Methods with Jaffray Woodriff

I read about Jaffray Woodriff from Quantitative Investment Management in Jack Schwager’s Hedge Fund Market Wizards right when it came out, and I was reminded of him during one of my sessions studying data mining. I googled him to see if I could find more details on him and found 2 articles (1,2). He uses a method called “ensemble methods”, which means he uses an aggregate of multiple models in order to increase predictive ability. Also, since he states that he only uses OHLC data, I assume that all of his secondary variables are some kind of technical analysis.

The idea of using ensemble methods is kind of similar to using multiple trading indicators, or trading filters; however, it is more formal since it incorporates Bayesian thinking. I assume that when Woodriff states he uses ensemble methods to combine 800 trading models, the models themselves were built using data mining techniques since ensemble methods originate from the data mining field, and in Hedge Fund Market Wizards he states that he uses data mining techniques to look for historically profitable patterns.

Another thing he states is that his underlying approach to system design is different than that of major quant houses such as D.E. Shaw:

Rather than blindly searching through the data for patterns—an approach whose methodological dangers are widely appreciated within, for example, the natural science and medical research communities—we typically start by formulating a hypothesis based on some sort of structural theory or qualitative understanding of the market, and then test that hypothesis to see whether it is supported by the data.

– D. E. Shaw in Stock Market Wizards

I don’t do that. I read all of that just to get to the point that I do what I am not supposed to do, which is a really interesting observation because I am supposed to fail. According to almost everyone, you have to approach systematic trading (and predictive modelling in general) from the framework of ‘Here is a valid hypothesis that makes sense within the context of the markets.’ Instead, I blindly search through the data.

– Woodriff in Hedge Fund Market Wizards

The fact that he disregards commonly accepted principles makes me question whether his alpha is generated from his ensemble methods, or from his unique approach (or both). Of course there is always the possibility that he has found a way of mindlessly mining the data without burning it, but I wonder if his mindless mining approach possibly detracts from his system’s alpha. This is definitely a topic for future research.



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