Financial Engineering

In 1986, Berlekamp began applying his experience in statistical information theory to technical studies of the price histories of a variety of financial and commodity markets. These studies were undertaken on behalf of Axcom, a company which used models and algorithms based on such studies to manage a portfolio of futures contacts.

 

Following a slump in Axcom's performance between June 1988 and June 1989, Berlekamp bought out the founder's controlling interest, became President of Axcom in August 1989, and moved the company to Berkeley. Algorithms were soon revised. Trading resumed in November 1989, and, as shown in the chart above, performance improved markedly. Returns to all investors in calendar 1990 exceeded 55%, net of all trading costs and steep performance fees.

On December 31, 1990, Berlekamp sold out his interest. As shown below, the trading algorithms, with a continual series of further enhancements and improvements, continued to perform very well for the remainder of the decade, yielding an annualized net rate of return to investors of about 30%. This fund has almost no correlation with any of the stock indices. Although the volume of trading is quite high, the volatility is surprisingly low. When the return/risk ratio of this fund is quantified by Sharp ratios, this fund is seen to have achieved an enviable sequence of record-breaking successes.

From 2010-2012, Berlekamp and several partners managed an algorithmic trading fund called "Berkeley Quantitative". Its initial investors went up 17% then down 15%, ending up barely positive. At its peak, the assets under management exceeded $250 million.

From 2000-2018, Berlekamp served on the finance and investment committee of the National Academy of Sciences. From July 2007-2013, Berlekamp also served on the Finance Committee of the National Academy of Engineering.

 

Bettor Math, a review by Berlekamp of William Poundstone's book Fortune's Formula, was published in the November-December 2005 issue of American Scientist

 © 2018 by M Hight