MIT's Tech Review: "The Blowup" / quants

[gaj]

<i>In Wall Street's summer of scary numbers, all eyes were on the mathematically trained financial engineers known as "quants."</i>


http://www.technologyreview.com/Biztech/19530/?a=f
http://www.technologyreview.com/Biztech/19531/?a=f

as a sidenote, they mention bookstaber in there...i'm hoping to read his book this week.


sidenote: i like the part at the end where half the room raised their hands about spreads widening, and half raised with spreads closing.

i was at a trader's expo where john bollinger spoke in '01, i think? and asked how many people were bullish. out of a room of a few hundred people, maybe 5 at most did, and 1 of them said he raised his hand just because no one else did.

THAT was a contrary signal; bollinger even said so at the time. if only i was smarter when i was younger...

 

[Algorithm]

so what's the contrary signal being given right now. Use that wisdom you think you have garnered and use it now.

Zig when others are zagging.

Good Luck!

 

[stupididiot]

Bullish in 2001? That didn't play too well did it?

 

[gaj]

Quote from stupididiot:

Bullish in 2001? That didn't play too well did it?

nope...but glad you weren't long 'my memory'.

i went through some sketchy posts of mine elsewhere, and i think from there i skipped '01. change it to 02 or early 03, then...

i did call a friend of mine afterwards about it, but he didn't take the trade (and i've checked, and he doesn't remember which year) either...

 

[QuantPlus]

It's a very good article... but hardly inside stuff.

A basic problem is that many highly-educated quants do not have enough trading experience.
Trading experience, primarily, helps you avoid losses in extreme markets.

It's the same story in every market crisis...
Always some variation of the LTCM fiasco...
Poor hedging, too much leverage, too much faith in models, not enough experience.

It's hard to view this as "news" anymore.

 

[MarkBrown]

see i don't think most so called quants are really quants at all. so it doesn't surprise me when i see that they have blown up. mb

 

[bluud]

Quote from Algorithm:

so what's the contrary signal being given right now. Use that wisdom you think you have garnered and use it now.

Zig when others are zagging.

Good Luck!

isn't everyone on a selling (shorting) spree ... so does that mean you are buying?

 

[maxpi]

Quote from MarkBrown:

see i don't think most so called quants are really quants at all. so it doesn't surprise me when i see that they have blown up. mb

Quant/ non-real Quant, how do you make that distinction? And if a real quant is trading off something that really is random in the longer term but working in the short term won't he get his real quantass spanked by the markets eventually?

I would say the better distinction to make is that between mathematically random and not random... I suspect that people of all education levels will always be venturing into random territory because of near term gains that will be wiped out when the market changes...

 

[mekas]

Quote from MarkBrown:

see i don't think most so called quants are really quants at all. so it doesn't surprise me when i see that they have blown up. mb

Please elaborate.

 

[QuantPlus]

Quote from maxpi:

Quant/ non-real Quant, how do you make that distinction? And if a real quant is trading off something that really is random in the longer term but working in the short term won't he get his real quantass spanked by the markets eventually?

I would say the better distinction to make is that between mathematically random and not random... I suspect that people of all education levels will always be venturing into random territory because of near term gains that will be wiped out when the market changes...

This gets to the heart of the matter.

Ultimately...
All quant analysis starts...
With UNDERSTANDING what is random... and what is non-random in the market...
And then building systems to exploit non-random market inefficiencies.

Taleb's title "Fooled by Randomness" is brilliant...
Because 99.9% of ordinary people do not understand the subtleties of market behavior...
And 90% of ET "traders" are exactly equivalent to coin-flipping monkeys.

The quants that get crushed often get this mostly right...
But where they get hurt...
Is BLINDLY ASSUMING that short to medium term historical relationships...
Will hold in the extreme markets that happen every 2-3 years.

They do not...
Because every once in a while...
You have semi-permanent "asset class valuation" re-alignments.

For example, since early summer...
Investment Grade US Corporate Bonds have diverged from US Govt bonds by about 10%...
Investment Grade REIT paper has diverged from US Govt bonds by about 15-20%...
And NOT reverted to "historical mean" at all.

All Investment Grade here... not even talking about Junk.

Zillions of inexperienced quants...
Have been working overtime...
Pairing up stuff across these asset classes...
(Because 90% of the time the correlations are VERY high).

But is an "asset class valuation" re-alignment like 2007...
A 10% divergence is enough to blow up a few hedge funds...
And for the whole industry to take a big hit.

10 years of experience is the key...
Because if you've seen this movie 5 or 6 times...
You will not step on the same landmines over and over.