Towards a new operational paradigm
The born of Rocket Capital Investment
Abstract
The world of Asset Management today, from a technological point of view, is mainly linked to mature but inefficient supply chains, which merge discretionary and quantitative forecasting models. The financial industry has been working in the shadows for years to overcome this paradigm, pushing beyond technology, making use not only of automated models (trading systems and dynamic asset allocation systems) but also of the most modern Machine Learning techniques for Time Series Forecasting and Unsupervised Learning for the classification of financial instruments. However, in most cases, it uses proprietary technologies that are limited by definition (workforce, technology investment, scalability).
Numerai, an offshoot of Jim Simons’ Renaissance Technologies, was the first to blaze a new path by building a first centralized machine learning competition, in order to gather a swarm of predictors outside the company, to integrate with internal intelligence. The discretionary contribution was therefore eliminated, and the information content generated internally was enriched by thousands of external contributors, in many cases linked to sectors unrelated to the financial industry, such as energy, aerospace, or biotechnology. In fact, the concept that to obtain good market forecasts, it is necessary to have only skills related to the financial world is overcome.
What we have just described is the starting point of Rocket Capital Investment. To overcome the limit imposed by Numerai, a new competition has been engineered, which has the ambition to make this project even more “democratic”. How? Decentralizing, thanks to the Blockchain, the entire chain of participant management, collection, and validation of forecasts, as well as decisions relating to the evaluation and remuneration of the participants themselves. In this way, it is possible to make every aspect of the competition completely transparent and inviolable. Everything is managed by a Smart Contract, whose rules are known and shared. Let’s find out in more detail what it is.
The state of the art of wealth management
The world of Asset Management today is less technological than one might think. We are not just talking about small unstructured companies, but a large part of the financial sector. Large resources (economic and technological) have been invested in customer profiling (from the proposal of investment products to the targeted marketing of ancillary services), in IT security (understood not only in terms of data protection, but also of fraud prevention), but very little in increasing the value of investment decisions.
The figure of the Asset Manager continues to be prevalent in the vast majority of Hedge Funds, effectively centralizing operational decisions. This often results in a scarce plurality of investment techniques and therefore in greater exposure to risk. In fact, the Asset Manager becomes the last element of the operational chain which, albeit supported by a team of experts, sees its possibilities limited. The prevailing elements that limit the possibility of improvement of a reduced-guide Hedge Fund, from a development point of view, can be summarized as follows:
- The number of models used (in small teams it is difficult to have experts in Fundamental Analysis, Quantitative Analysis, Machine Learning, Evolutionary Algorithms, or Reinforcement Learning at the same time).
- the small number of different models generates similar strategies under equivalent conditions, which will result in a high correlation and therefore in a higher expected risk
In addition, the value element of a Hedge Fund is generally not the performance on the market, but the AUM (“Asset Under Management”, or the capital under management). Too often, investors embrace the “big capital managed equals better performance” paradigm. Unfortunately, the statistics say something else.
However, there are excellences that grow in the shadow of large and small businesses. Among these is certainly Numerai, an offshoot of Jim Simons’ Renaissance Technologies, the Hedge Fund that has recorded double-digit returns, year on year, since 1988 and which bases its operations exclusively on quantitative algorithms. Numerai has created a tournament open to all those who have knowledge of Machine Learning: every week it proposes a dataset that refers to over 5000 regulated American equity assets and asks to determine a forecast for the following week. The goal is to accumulate enough predictors to allow you to improve the performance of your internal systems. To ensure that Data Scientists continue to provide their forecasts on a regular basis, a progressive remuneration in tokens is envisaged, linked to the goodness of the forecasts themselves. In the case of Numerai, the formulas that manage the ranking (“Ranking”) and regulate the prizes (“Reward”) are not public and there is no way to independently verify their veracity.
This was the starting point for the creation of a new decentralized version of the Machine Learning Competition, to power the Rocket Capital Investment Hedge Fund.
The Rocket Capital Investment Competition
Rocket Capital Investment was created to make the most of the combination of Artificial Intelligence and Blockchain, declining in every single business aspect. It is the AI that generates the investment decisions, and it is the Blockchain that keeps track of every single transaction on the market. This, to guarantee both customers and the regulatory body, allows you to have a real-time snapshot of trends and exposure on the markets. The Blockchain also allows complete transparency of all corporate budget and accounting operations.
And the Blockchain itself becomes the distinctive element of the new “Rocket Competition” which was officially launched in October 2021.
Starting from the idea of Numerai, we have completely re-engineered all aspects related to the management of participants, Scoring, and Reward, following the concept of decentralization of the production chain. To this end, a proprietary token (MUSA token) has been created which acts as an exchange currency and which integrates a smart contract that acts as an autonomous competition manager. The communication interface between the users and the smart contract is a DApp (“Decentralized Application”). But let’s see in more detail how all these elements combine with each other, like in a puzzle.
A suitably normalized dataset is issued every week, containing data from over 400 cryptocurrencies. For each asset, the data relating to prices, volumes traded, quantitative elements, as well as alternative data (information on the blockchain and on the sentiment of the various providers) are aggregated. Another difference with Numerai is the ability to distinguish assets for each row (the first column shows the related ticker). The last column instead contains the question to which the Data Scientists are asked to give an answer: the relative strength ranking of each asset, built on the forecast of the percentage change expected in the following week.
Registration for the Competition takes place by providing, in a completely anonymous way, the address of a crypto wallet on which the MUSA tokens are loaded. From that moment on, the MUSAs become, to all intents and purposes, the currency of exchange between participants and organizers.
Every Monday a new Challenge opens, and all Data Scientists registered in the Contest are asked to use their models to generate predictions. By accessing the DApp, the participant can download the new dataset, complete with the history of the previous weeks and the last useful week. At this point the participant can perform two actions in sequence directly from the DApp:
- Staking: MUSA tokens are placed on your prediction.
- Submission: the forecast for the following week is uploaded to the blockchain.
Since the forecast consists of a series of numbers between 0 and 1 associated with each asset, it is very easy, the following week, to calculate the error committed in terms of RMSE (“Root Mean Square Error”). This allows creating a ranking on the participants, to be able to reward them accordingly with additional MUSA tokens. But let’s see in more detail how the Smart Contract, which was created, allows us to differentiate the reward based on different items (all, again, in a completely transparent and verifiable way):
- Staking Reward: the mere fact of participating in the competition is remunerated. In future versions, it will also be possible to bet on the goodness of the other participants’ predictions.
- Challenge Reward: based on the placement on the current Challenge Score, all participants included in the 75th percentile of the distribution are rewarded. Important note, those excluded from this ranking do not lose the bet tokens (as opposed to Numerai which destroys the not winning tokens, through a “burning” operation). This element, in addition to favoring the use of tokens, amortizes inflationary phenomena.
- Competition Reward: it is the distinctive element that qualifies, more than the others, the value of the participant. This is the “career” award, which rewards the regularity of the submissions and the value of the predictions over time (the calculation, once again delegated to the smart contract, is based on the Competition Score).
The entire supply chain described has the dual purpose of retaining the most capable participants, creating a certified career in blockchain (transparent and non-falsifiable), and providing Rocket Capital with a continuous flow of weekly predictors. This flow refers to an Internal Intelligence which has the task of extracting value from all predictors or from recurring clusters of predictors.
Inspired by the Wisdom of Crowds theory, it is possible to power both a filtering system for the fund’s operations and an independent statistical trading algorithm. We can therefore say that all this competing information can lead to improved performance and risk containment of internal trading and investment systems.
Rocket Capital, therefore, offers an entire innovative ecosystem which, decentralizes the workforce outside the company, guaranteeing remuneration over time to the best Data Scientists around the world, and promises greater stability of performance thanks to better protection from financial risk.
The objective, to date, is to broaden the pool of participants in the Competition, bringing further variety both in terms of the sector of origin and of the models used. The possibility of betting on the predictions of other Data Scientists goes in the direction of further “gamification” which, likely, will bring further interest and participation in the current competition. Finally, it must be said that the architecture proposed by Rocket Capital is extremely easy to scale and this opens the door not only to further competitions issued by the Company itself but also to the creation of independent competitions issued by third parties.
Conclusions
In this short article, we have tried to outline what is the highly innovative element that led Rocket Capital to the creation of the Rocket Competition. A decentralized competition which, through the use of a smart contract, independently manages the participants (who connect via a crypto wallet), the scoring, and reward functions. This architecture feeds, in a virtuous circle, thousands of Data Scientists, rewarding the best with a highly inclusive algorithm (no token burning and an enlarged audience at the 75th percentile of distribution). This external workforce contributes to the creation of a flow of machine learning predictors that can support the investment decisions of the proprietary hedge fund. For more in-depth reading, we refer you to the White Paper which you can find at the following link: https://rocket-capital-investment.gitbook.io/rci-competition/white-paper
Rocket is the Home for Data Scientists. We are a Licensed Financial Institution, headquartered in Singapore with Decentralised and Distributed Intelligence. For more information, please visit and follow us on the following platform.
— by Giovanni Trombetta
