It is no secret that quant funds (and a number of what we will call "quasi-quant" funds) as a whole have taken it on the chin the last several months. Funds with heavy quant components of neutral equity market strategies, for instance, have been handed their mud-stomped hats in 2008- many with 40%+ losses in November alone. Some subsets of neutral equity market strategies, fundamental long-short strategies for instance, have performed slightly better, but overall, you would have done better investing in the S&P 500 index for 1 month, 3 month, 6 month, 1 year, 2 year, 3 year and 5 year periods than touching most neutral equity market funds.
But fear not. Quants, according to Reuters, have a place in the Aisle 5 cleanup taking place in the financial service supermarkets.
Many of these so-called quantitative analysts, or "quants," graduating from elite financial engineering courses will end up writing computer programs that handle an ever greater share of market trading.Because some of their mathematical models failed to take into account factors that later turned out to be crucial, quants have been blamed for compounding risk and exacerbating the crash in financial markets.
But far from going into decline, those with financial engineering degrees are still in demand as hedge funds and banks seek ways to measure previously unforeseen risks and factor them into their models.
Of course, doomsayers of the world (we are looking at you Taleb) have been doomsaying for a long time, so its pretty easy to take credit for the dip when you have been calling for a dip for 10 years, but quants make such easy targets. The deep stereotypes (pale skin, socially inept, Star Trek fans, or Star Wars fans, we understand the two divisions are in the midst of a blood feud at this very moment) make them subject to ridicule and scorn. But we'd like to be the first to call for a major resurgence of the quants. Seriously. We can summarize the thesis easily simply by quoting a drunk quant heard raving in the street outside of Marquee just this last weekend.
"Whatcha gonna model with then? Huh? Whatcha gonna use? Option pricing? Huh? I got your normal distribution right here. You are stuck with it. You got nuttin' else. NUT-IN."
Ok, it's true that, the douchebag trader (who looked suspiciously pink-slipped now that we remember it) immediately cracked him in the nose and dropped him with the first punch.
Still, from the gutter, through the now freely flowing blood, the quant gurgled "You can't win. If you strike me down, I shall become more powerful than you could possibly imagine." I think we all know that he's right because, come 2009, that quant will be busily honing the details on the next killer model that will inflate and dramatically explode the construction, and transportation sectors in the massive infrastructure bubble that is just over the horizon.
Buffeted "quants" are still in demand [Reuters]
Posted by guest , Dec 22, 2008 9:48AM
First
EP did you read the Opening Bell?
Posted by guest , Dec 22, 2008 9:50AM
You know, I've had these ridiculous late night conversations and I prayed no one was listening...
Posted by HAM05 , Dec 22, 2008 9:51AM
wait, you go to marquee?
Posted by VOL IS KING , Dec 22, 2008 9:54AM
Equity Private:
Nassim Taleb, George Soros, and possibly James Simmons are the only ones who actually understand the financial markets. I'm quite certain Taleb didn't just predict the problem but its exact nature and from where it would arrive.
Statistical inference does not work for modeling financial instruments. Period.
Posted by guest , Dec 22, 2008 9:55AM
She said outside Marquee. Maybe on her way to the pink elephant?
Posted by guest , Dec 22, 2008 9:59AM
@4
Plenty of contrarian blowhards did. Those are just the biggest names. My main problem is these guys get a check by playing the boogie man.
Posted by guest , Dec 22, 2008 10:01AM
maybe this just proves you can't really model something as complex and human-driven as financial markets
Posted by guest , Dec 22, 2008 10:03AM
Taleb was lucky! lol he knows as little as everybody else he just bought teeny options which he lost money on forever until end of 2008.. overall this strategy doesn't make money long-run cuz then when thing stabilize they just keep expiring to zero again
Posted by guest , Dec 22, 2008 10:05AM
I hear AQR is hiring if you like to be on the receiving end of an Asness clownface
Posted by guest , Dec 22, 2008 10:09AM
@9, If AQR is hiring, it must be in its janitorial services or food services departments, as its research staff is being turfed out, slowly and quietly.
Posted by guest , Dec 22, 2008 10:11AM
Most "market neutral" funds are half-assed stock pickers masquerading as quants. The media cannot tell them apart. Many true quant funds have done very well in this environment. Blaming nerds may feel good, but lacks merit.
Posted by guest , Dec 22, 2008 10:12AM
So tell me, how do you put a math formula behind fear and greed?
fear = -1000 points to the dow
greed = +1000 point to the dow
Posted by guest , Dec 22, 2008 10:13AM
EP - you forgot Babylon 5
Posted by guest , Dec 22, 2008 10:15AM
@13
EP, along with everyone else.
Posted by guest , Dec 22, 2008 10:19AM
It doesn't matter how many mathletes they hire.
The quant guys did great for a couple of years. Then - everyone figured out that quant guys were doing great, and everyone poured money in - individuals, pensions, fund of funds. So the returns narrowed, and the outperformance shrunk.
This happens when there is a market opportunity - money rushes in and the opportunity ends. Because (as we saw this year), if everyone has the same strategy and tries to get in or out at the same time, everyone goes way up or way down at the same time.
So hiring new people will only give you a temporary "high" if you happen to find that next unexploited opportunity. But that opportunity disappears as the money floods in. The PROBLEM is that the quants refuse to look for the next opportunity, because it had gotten too easy just shoveling assets into the old one.
Posted by guest , Dec 22, 2008 10:24AM
@ 8
"Taleb was lucky! lol he knows as little as everybody else "
Taleb knows that he knows very little
thats his whole argument....that everyone should assume that they know a lot less then they do.
But you knew that already right?
5H3K1
Posted by VOL IS KING , Dec 22, 2008 10:30AM
@8:
Don't confuse Taleb's trading strategy with his message. His trading strategy is retarded. There's a much more efficient way to make money on "black swans" than buying deep OTM puts. (I believe he expected to lose money however and considered this strategy to be "insurance". However, unlike with other types of insurance no one will pay you money every year for "market insurance" while the market is going up.. They'd rather give their money to Madoff or Griffin)
However his thoughts about the nature of uncertainty are spot on and deeply useful in practice if you realize the full nature of their implications to the options market. (I am not sure Taleb himself does realize all of these implications).
Posted by guest , Dec 22, 2008 10:38AM
@7: The market can be modeled, and the model will work most of the time. Just that when it fails, and it will fail, it will fuck you hard. Problem is, everyone wants something that they can plug into a trade-o-matic and then forget about while it prints them money.
Posted by guest , Dec 22, 2008 10:48AM
@9
If AQR is hiring it will be to stock up on Lawyers for the disilution of the firm and its assets. Like Vultures circling over the rotting remains of a Hyena.
Posted by guest , Dec 22, 2008 10:52AM
@ 19 Is it confirmed that AQR is dissolving?
Posted by guest , Dec 22, 2008 10:59AM
@18 -- a model that works only 90% or even 95% of the time is worthless over the long run
Posted by guest , Dec 22, 2008 11:00AM
@20
Don't know not in the know...
Posted by Anal_yst , Dec 22, 2008 11:09AM
@18
Bingo.
All the theory, the models, the correlations, etc all work, that is, until they don't.
Posted by VOL IS KING , Dec 22, 2008 11:12AM
@21:
I am willing to sell you my Broken Clock Asset Pricing Model, it shows statistically significant results at least twice per day. I won a nobel prize for it. How much will you give me?
Posted by eye82 , Dec 22, 2008 11:27AM
quant my ass....fundamental analysis is the one and only approach. Graham, Buffet etc base their investments on fundamental analysis.
Past price movements dont tell you anything about future opportunity and hidden value...
Posted by guest , Dec 22, 2008 11:35AM
@25:
Ben Graham said never buy a company for more than the value of its assets - liabilities. Have fun looking that opportunity.
Either you realize financial statements are historical data just like prices or I suspect you will soon join Mark Sellers in value fund manager Hedes.
Posted by guest , Dec 22, 2008 12:04PM
Quants suck. Long live fundamental analysis!
Posted by guest , Dec 22, 2008 12:16PM
Taleb the rogue quant has just been calling BS on his comrades. OF course they don't like it.
Posted by guest , Dec 22, 2008 12:31PM
Why are quant funds being so vilified at the moment? Quant funds traded with maximum confidence based on the results that their models had tested and provided. So, how is that any different than the trading behavior of fundamental analysis based trading? Don't analysts continually shift the hierarchy of criteria that they give weight to? Don't analysis find new ways of interpreting the data which they procure? Is this issue more of an argument regarding the efficacy of non-fundamental analysis?
Posted by VOL IS KING , Dec 22, 2008 12:45PM
@29:
You're correct, fundamental analysis is just a different flavor of bullshit.
Posted by guest , Dec 22, 2008 12:58PM
This is one of the least factual articles I have read on this site. Quant EMN funds have outperformed most other strategies outside of vol arb and short biased. The 40% losses for EMN funds in November are due to Madoff write downs, not do to their models underperforming. It would be nice to get ppl that actually know what the hell they are talking about bf they make ridiculous claims.***For the record, I do not work nor have ever worked for a quant fund...
Posted by VOL IS KING , Dec 22, 2008 1:06PM
uh didn't the madoff scandal come to light in December?
Posted by guest , Dec 22, 2008 1:06PM
Vol is King @17
Re: Taleb: "However his thoughts about the nature of uncertainty are spot on and deeply useful in practice if you realize the full nature of their implications to the options market. (I am not sure Taleb himself does realize all of these implications)."
Interesting - I, too, was beginning to suspect that Taleb doesn't follow his thoughts to their ultimate conclusion! What do you think is the holdup?
Posted by VOL IS KING , Dec 22, 2008 1:13PM
@33:
He doesn't trade actively anymore. He's not looking at the prices everyday. He'll probably never realize it at this point. Also, he just wants to not lose money, he doesn't think about how to make money. Besides that, I don't know.
Posted by guest , Dec 22, 2008 1:28PM
Not quite sure where EP gets her market data. HFR's Equity Market Neutral index is down only 3.21% YTD and up 0.29% in Nov.
https://www.hedgefundresearch.com/mon_register/index.php
I am disappointed in the lack of research here--its even below DBs already low standards.
Posted by guest , Dec 22, 2008 3:30PM
@31
Thank you for pointing that out. Quant MN for the most part has held up well this year. Quoting CSFB/Tremont indexes will forever be skewed by Madoff. You would hope someone posting about 40% losses would have been curious enough to figure out how that could have happened. Very poor research done for this post.
Posted by guest , Dec 22, 2008 3:34PM
@31 & @35
Thank you for pointing out the poor research. Quant MN for the most part has held up well this year. Quoting CSFB/Tremont indexes will forever be skewed by Madoff. You would hope someone posting about 40% losses would have been curious enough to figure out how that could have happened. Very poor research done for this post.
@33
they took the losses in November
Posted by guest , Dec 26, 2008 3:36PM
EP's article is garbage. not worth the electricity that was spent in its creation.
HFR's equity market neutral index is -3% YTD through november. the tremont index was -40% in nov due to madoff's writedown (don't know why they didn't take it in dec, nor why an index provider had 40% of its index in one fund, but those are other topics), but the quant funds have done just fine. and by the way, no one has really answered why a fund that was ostensibly trading options using a split-strike conversion strategy was in an equity market neutral bucket in the first place. and, oh yeah, MADOFF WAS NOT A QUANT, HE WAS A FRAUD.
HSKAX, which is highbridge's mutual fund, using 1X1 leverage at a max, is up solidly on the year. i invest mostly in quant funds, i'm up double-digits on the year, and my worst performers, by far, are discretionary guys (the worst of those is -20% on the year). more than 90% of the quant managers in my book are up on the year. more than two-thirds of the quants i know in general are up on the year. nearly every single quant i know is outperforming both the S&P and any major hedge fund index.
as a more general problem with this article, and with the industry's understanding of quant trading in general, not all quants do equity market neutral strategies. there are systematic CTAs of several varieties (longer-term trend following, shorter-term trading, and quant macro, the latter of which is like the CTA world's analogue for quant-long-short). CTA indices show trend followers +13-16% (newedge CTA index +13, HFR systematic macro +16%, CS/Tremont +16%), and newedge's short-term CTA index is up almost 13% as well. there are also systematic options traders of many types, and though there aren't good indices for them, i can tell you from firsthand knowledge that most of them are up a bunch this year too. even in equities, there are high frequency quants and stat arb traders that don't look much like a quant-long-short player, and both of those two groups are performing well.
the kind of badly-informed nonsense put up by EP is typical. people tend to act stupid and scared about things they simply don't understand in the least. it's the same as we see with bigots, sexists, homophobes, fundamentalists, etc. EP probably can't help being retarded, but its boss should be embarrassed for having employed it.
-hh