interesting article from the ft here. i agree with the article to be honest thats my view. its a large article so click on the link but here are some of my favourites sentences from it 'Furthermore, concerns that the models have been playing havoc with markets persist. The tell-tale signs are sudden movements in US equity indices, most frequently as a result of a sell-off in the last hour of trading sessions, which are accompanied by steep increases in volume as the computer-based trading programmes sell huge numbers of shares quickly. These late-day swings have occurred more recently as well, suggesting that the August pattern was not a one-off. ' ' Other critics offer a more fundamental explanation for the recent problems endured by quant models â lack of innovation and unrealistic assumptions. Nassim Nicholas Taleb, author of the best-selling books The Black Swan and Fooled by Randomness: The Hidden Role of Chance in the Markets and Life, go so far as to say that the very principle of using quantitative models based on history is bound to fail and should be abandoned.' http://www.ft.com/cms/s/0/553fea68-a68e-11dc-b1f5-0000779fd2ac.html
The quants tend to want to do the same thing at the same time. This brings about concentration of their positions and correlation of their rates of return. That can then create price spikes, to the upside AND downside. Upside movement is "good". Downside movement is "bad" says Maria Bartiromo.
"The quants tend to want to do the same thing at the same time." Why expect anything else? They study the same things, go to the same schools, play the same sports, work for the same places, etc. They are a breed and a herd. N'est ce pas?
Frankly... Taleb has always come across as a carefully constructed "guru"... And NOT as a professional trader. That quote pretty much proves it. Quantitative models work well 90% of the time... But will crush you 10% of the time... If you SLAVISHLY stick to them like poor Nassim. Experienced traders KNOW when to abandon their models... And fly by the seat of their pants... Like in a liquidity crunch or other financial crisis... Because historical relationships become meaningless... And you actually have to counterintuitively do the OPPOSITE.
Great point. It's like turning around a big ship in a storm... and then going the other way. If you are managing 10 million... You can turn and head the other way in a few days... If you are managing 10 billion... you are pretty much f*cked. OK... So if your hedging options are limited... YOU MUST START TAKING LOSSES... Instead of trying to ride it out. Taking people who lost 50% did it over several weeks... Because they DID NOT HAVE THE BALLS to take a smaller loss. Poor Nassim... He should actually be doing great in 2007... It's the Year of Black Swan events.
If they were that good they'd be out there developing and trading their own system. Most quants ( and much of wall street for that matter ) are un-imaginative sheep. If the leader of the herd moves in one direction, they all move in that direction. The profitability of a quant shop is usually directly correlated with its located distance from wall street.
Thats a good point - distance from wall street. Can anyone copy in the FT article. (I should probably subscribe, not sure what it costs) I own all of Talebs books and his assumptions regarding trading are absurd. Anyonne who ever thought a single thought about something like cognitive science would know - that a: I woke up found food, crossed the street, didnt die. The fact that I will one day die does not invalidate all the actions in between that time.. Taleb has reduced the traders reality to a singularity that he cannot prepare for. It says nothing for the inner logic that nature uses to hold the reality of our cells and bodies together, as well as languages and societies. (i.e if it exists why is suggesting that quants can't model it?) We model extremely complex wargames, flight simulations, golf, car racing ... why can't according to Taleb - we model risk and rewards?) Clearly Taleb is now a luddite.
MIT back tested a proxy for a typical hedge fund strategy used by quants. It involved buying buying the previous day's losing stocks and selling the winners. In 1995 the strategy delivered a 1.38% daily return before costs, by last year it was down to 0.15% a day. (from an Economist.com article in October). All of these guys eventually start doing the same thing and getting in each other's way. Now I'm sure that the study mentioned above is an simplification of what quant's do, but not by much. Frankly, you don't need much more creativity than that when you have large dollars in a liquid market, in this case probably the top 2 or 3 hundred most active stocks.