"Trading as a Business" quant interview, highly recommended

lol, let me take a wild guess. You read some quant writeup by Goldman and lost your whole 5k USD account as a result. Or you are a second year MBA and just sat your first options class and now believe you are qualified to interpret history. I think its better to read up on some quality treatises rather than pissing around and trying to look smart which you clearly dont...just my 2 cents...


Quote from pedro01:

Indeed - it's the one's that win the Nobel Prize that cause the most havoc.

I didn't say I don't like quants. I just think they should be shot for the benefit of mankind.
More...
 
"July 8 (Bloomberg) -- John Meriwether, who roiled global markets when Long-Term Capital Management LP collapsed in 1998, plans to shut his current hedge fund, according to a person familiar with the matter.

JWM Partners LLC is closing its main Relative Value Opportunity II fund after losing 44 percent from September 2007 to February 2009. Meriwether, credited with generating billions of dollars of revenue at the former Salomon Brothers in the 1980s through so-called relative value trades, returned an average of 1.46 percent a year with his new fund since opening in 1999, compared with 2.4 percent for the Credit Suisse/Tremont Hedge Fixed-Income Arbitrage Index. "

John Meriwether, not a quant, almost killed the global economy in 1998, by getting Nobel laureate quants to do what he wanted them to do.

He now plans to shut down his current hedge fund, which returned a remarkable 1.46% per year.
 
Quote from asiaprop:

buddy, again you are wrong, portfolio insurance has NOTHING WHATSOEVER to do with option replication. Its the insurance of a long portfolio against adverse moves by using short index futures or long put options.

Even if your points were accurate the conclusions you draw from them are illogical and dont hint at you having undergone a deep thought process. Why would everybody sell at the same time just because portfolio insurance is what you (incorrectly) described as such?

People sold en masse because panic set in. Aside any of the program trading massive amounts of papers were dumped onto the market in 87 by HUMAN HANDS, HUMAN MINDS, that had nothing whatsoever to do with quants, mathematical models, options, BS,.....
It all can be summed up by one term : Psychology!!! This is what drives mania, bubbles and the subsequent destruction of those for thousands of years. No mathematicians needed. I am not sure what your points actually are!!!

P.S.: Options were traded well before 1987, what the heck are you talking about. You sound more and more clueless. Options were in fact traded already on tulip bulbs hundreds of years ago....
More...

You seem to have a habit of trying to put words into my mouth. Options have been around for years, long before Black Scholes. at no point did I say they havent. Right now, we still have a vibrant options market in which Black Scholes does not dictate the option prices. Perhaps you can show where I said that options were not traded before 1987.

I do agree with your definition of portfolio insurance 100%:

"A strategy of hedging a stock portfolio against market risk by selling stock index futures short or buying stock index put options."

What a shame this wasn't the reality in 1987:

The inspiration for portfolio insurance oddly enough came from an academic setting. In September 1976, Hayne Leland, a young finance professor at Berkeley, consumed with worry over his family’s finances had a midnight brainstorm. He approached a colleague, Mark Rubinstein, the following morning and the pair became so enamored of their ideas that they decided to form a company to market their new product called “portfolio insurance.” However, it wasn’t until a full two years later that the duo had ironed out all the kinks in their trading strategy, and with the help of professional marketer and portfolio theorist John O’Brien they scored their first client in 1980.

From inauspicious beginnings came a virtual tidal wave of demand for the group’s “product,” as well as a whole host of competitors offering similar investment insurance. In fact, by 1987 approximately $60 billion in equity assets were covered by different varieties of portfolio insurance, the majority of which was on behalf of conservative pension funds.

The initial concept underlying Leland’s creation was to replicate the performance of a put option in what was referred to as a “dynamically programmed system,” where a client was automatically shifted out of a position (via computer) when it began to fall, increasing the client’s cash as long as the stock fell and “insuring” that a predetermined amount was all that the client could lose.

Here’s how it worked: Say you bought 100 shares of Replicants R Us at $100 a share, and simultaneously bought a put -- the option but not the obligation to sell Replicants stock to someone else at a stated price over a specified period of time -- with an exercise price of $90. In this way, no matter how low Replicants R Us shares dropped due to “malfunctioning” replicants killing humans, you couldn’t lose more than $10 on each share. In this example the floor was set at $90, and by the time the stock reached this price in the market, your portfolio would be 100% in cash. The distance then, between the starting point and the floor, was like a deductible on a normal insurance policy -- the $10 per share being the amount that you as a policyholder would have to cover. So if the market fell, the portfolio would slowly liquidate some positions, but still hold some stock. If the market rose, the portfolio would be buying, but still hold some cash. The slight degree of underperformance, in both directions, that results serves as the “premium” for the insurance.

Today, in a period when program trading is routine, this particular scheme looks a little archaic. However, at the time, the mechanics of running an operation in which hundreds of simultaneous buy and sell orders needed to be executed for just one portfolio were understandably complicated as well as costly. In addition, active portfolio managers bristled at being second-guessed by "some computer.” The saving grace for human and computer alike came in the form of futures contracts on the S&P 500, made available in 1983. These contracts allowed investors to buy or sell a proxy for the overall market, that is, an index of 500 leading companies in leading industries.

Under the guise of portfolio insurance, the futures transaction in this instance was an agreement to sell the “intangible commodity” of 500 stocks in the index at a specified date and a prearranged price. Portfolio managers would hedge their stock portfolios by selling index futures. Instead of buying and selling hundreds of stocks and options, the S&P index futures promised an effective, inexpensive, and greatly simplified form of portfolio insurance. They functioned almost exactly like the put scenario described previously, with one crucial difference that left the promise unfulfilled.

The owner of the futures contract makes a cash settlement based upon the variation in the index between the signing of the contract and its maturity. Every day investors are required to fork over cash to the exchange (which represents the other side of the transaction, as opposed to an individual or firm) to keep the contracts fully collateralized. The actual construction of the futures contract was not the problem in 1987, it was the selling of shares in the stock portfolio in order to make the hedge worthwhile.

Recall the put scenario. This option was "put" to the seller at the exercise price of $90. Again, that means however low Replicants R Us shares dropped in the market, the seller of the Replicants put is legally bound to buy the shares at $90 if the owner of the option puts the stock. That was the insurance -- Relicants R Us stock could fall to $30, but the seller was obligated to buy at $90! However, with the stock index future, it could be sold and the money could be collected, but in order to make it all worthwhile the stocks in the portfolio had to be sold to prevent the loss.

The crucial difference boiled down to the fact that the market was not obligated to purchase any of that portfolio stock at the price that the portfolio manager wanted. Those who used index futures as a hedge assumed that the necessary liquidity would be available from the market. It wasn't. The truth is, during the crash most "insured" portfolios did better than those that were "uninsured," but the selling of the portfolio stock took place at prices far lower than anticipated. For example, instead of locking in a price at $90 for Replicants R Us shares, those that insured their portfolios with index futures would have undoubtedly received a price below $90 because the buyers were just not there during the waves of selling that occurred.
More...

http://www.fool.com/Features/1997/sp971017CrashAnniversaryFlawedInsurance.htm

I have no axe to grind here. I just subscribe to the opinions of Taleb, Triana and the like.

The market can price options better than any computer model and certainly the probability estimates of outlying events in the most widely used quantitative models has been show severely lacking.
 
Quote from pedro01:

That last statement is not true.

The Value at Risk at Bear Stearns was just over $60M the day before the value of Bear Stears was wiped out to the tune of $8bn.

How is it my choice that people in huge financial institutions rely on flawed mathematical concepts to take huge risk ?
More...
You misread my comment.

It's not your choice. By 'you' I was referring to the risk manager/trader that chooses to believe blindly in numbers that are given to him by whatever system he uses.

The point that you keep making is misguided. All you're saying is that if everyone simultaneously subscribes to the same model, whether it's CPPI, gaussian copula or whatever else, the world goes to hell when the underlying assumptions are violated (e.g. liquidity disappears, etc). Well, DUH!

You completely fail to see two very simple points: a) the issue you describe is not about quant models, but rather about humans (recall the tulip mania and the South Seas Co; no quant models there); b) it's not the failure of the model, but a failure of incentives that cause 'herding', which exacerbates the boom and bust.

EDIT: As I keep saying, time and again, I'd go with Fisher Black over Taleb any day. Taleb has nothing constructive to say, while Mssrs Black & Scholes, regardless of whether right or wrong, have increased our understanding of the world immensely.
 
Quote from asiaprop:

lol, let me take a wild guess. You read some quant writeup by Goldman and lost your whole 5k USD account as a result. Or you are a second year MBA and just sat your first options class and now believe you are qualified to interpret history. I think its better to read up on some quality treatises rather than pissing around and trying to look smart which you clearly dont...just my 2 cents...
More...

Nope - I run a software company, we produce programming languages, forecasting models and simulations for planning purposes.

I'm at home today as it's a slow day so I thought I'd annoy some people on line with my opinions of my peers in the financial world :p

I promise I'll stop when the markets open - US markets that is - still 6 hours to go... :D
 
Quote from Martinghoul:

You misread my comment.

It's not your choice. By 'you' I was referring to the risk manager/trader that chooses to believe blindly in numbers that are given to him by whatever system he uses.

The point that you keep making is misguided. All you're saying is that if everyone simultaneously subscribes to the same model, whether it's CPPI, gaussian copula or whatever else, the world goes to hell when the underlying assumptions are violated (e.g. liquidity disappears, etc). Well, DUH!

You completely fail to see two very simple points: a) the issue you describe is not about quant models, but rather about humans (recall the tulip mania and the South Seas Co; no quant models there); b) it's not the failure of the model, but a failure of incentives that cause 'herding', which exacerbates the boom and bust.
More...

Nope - I don't disagree with any of that. I agree with all of it except the part about complicity.

When Moodys rated a derivative AAA, I don't think the buyers of the derivatives understood the risks they were taking, although I may be wrong.
 
Quote from asiaprop:

It all can be summed up by one term : Psychology!!!
More...

I'm sorry, but I think you have to do a little better than that. Everything is about psychology. This is just another commonplace statement, which can be applied to any area of life.

Quite frankly, I don't see what your point is.
 
Quote from HiddenAgenda:

"July 8 (Bloomberg) -- John Meriwether, who roiled global markets when Long-Term Capital Management LP collapsed in 1998, plans to shut his current hedge fund, according to a person familiar with the matter.

JWM Partners LLC is closing its main Relative Value Opportunity II fund after losing 44 percent from September 2007 to February 2009. Meriwether, credited with generating billions of dollars of revenue at the former Salomon Brothers in the 1980s through so-called relative value trades, returned an average of 1.46 percent a year with his new fund since opening in 1999, compared with 2.4 percent for the Credit Suisse/Tremont Hedge Fixed-Income Arbitrage Index. "

John Meriwether, not a quant, almost killed the global economy in 1998, by getting Nobel laureate quants to do what he wanted them to do.

He now plans to shut down his current hedge fund, which returned a remarkable 1.46% per year.
More...

Quite....

Mind you - there have been years when I'd have murdered for a 1.46% gain... :)
 
Quote from pedro01:

Nope - I don't disagree with any of that. I agree with all of it except the part about complicity.

When Moodys rated a derivative AAA, I don't think the buyers of the derivatives understood the risks they were taking, although I may be wrong.
More...
Of course they didn't... 'Cause guess what was going through their heads? It wasn't the gaussian copula and its flaws.

What I'd like to understand is at which point in the whole toxic CDO chain you absolve the actual decision-makers of the responsibility for their decisions and start suggesting that they're just innocent victims of the evil quants with their models.

EDIT: That Wired article about David Li is not a very good one...
 
You must log in or register to reply here.
Back
Top