Hyp, I wasn't taking a shot at you...I agree with you. They were arrogant. I remember reading in college that their model did not include the possibility of a volitile market or a market crash. (It also didn't included trading costs or slippage). Peace, Axe
You should realize that all of their positions where in OTC derivatives and their loss was someones gain. Actually, the main (in my humble opinion) reason for their demise was that when the market went against them, some of the investors propped up on their positions by requestion liquidation and taking the opposite side of the market. Everyone had a ball at their expence.
Well, an average quant makes more then an average prop trader at a prop firm or a day trader trading from home. And they have a nice, secure job - would not that be a good reason to become a quant?
...now I understand. Your dry sense of humor is even more arid than mine! What I found utterly astonishing (being a country boy) was that some of the banks which were bankrolling them were also writing the illiquid swaps they went so deeply into. Also their naivete in swimming out to play with legendary fiancial sharks was fascinating to read about. As the Russian proverb goes: "Do not call the bear to save you from the wolf, for who then will save you from the bear?"
There is an excellent yet brief case study of the LTCM debacle here if anyone is interested: http://www.erisk.com/reference/case/ref_case_ltcm.asp it also mentions something that was also very apparent from the book that a few people have mentioned. That is, the firm was so sucessful after the first few years that they were running out of ideas where to put new money. Greed, hubris, whatever you want to call it, it resulted in them getting into a lot of trades that were pretty far away from their core competencies. (sp?) Those aspects were what made the bookssuch a fine read. As quantative as they were in their strategies to begin with, psychological factors caused them to push the envelope (actually if you read the book some (a small minority) of the trades were obvioulsy "gut feel" trades if you ask me. I'm rambling, but the bottom line is even when the fund was about to sink the partners were still bitching about bringing in help (early on) because they didn't want their equity stakes diluted. :eek: They were of the, we just need more time and the fundamentals were reassert them selves, belief and while ultimately they were right, margin calls as well all know don't wait till fundamentals or equilbrium or whatever reassert themselves. LOL No margin....Liquidation time pal. And yeah as someone said when you've got positions as big as they do you have a problem when almost every firm around has seen you do well, copied or emmulated your strategy on some level and knows you have to liquidate which would ofcourse hurt their similar positions. Anyway, good read from the link. The book is a must read if the case study peaks your interest. (may have to register at that link. Not sure.)
Now, how come every time quant finance is brought up here LTCM comes up? Nobody ever mentiones 100 trillions of dollars (notional) in IR derivatives today (all quant stuff), nor a number of stat arb funds, some of them making about the size of LTCM's losses every year (look at clinton for example), but somehow LTCM is always there.
This is kind of a good thing, but look at LCRM and the guy that bankrupted Berings bank, maybe every one of these quants are somewhat of a disaster waiting to happen? BTW I know a guy that did regression analyses for LCRM and he says their attempts at price prediction analysis failed them (along with everything else.) He of course, tells me that technical analysis therefore does not work since he has such exposure to quants. I would far rather manage my own money with tech analysis than turn it over to some highly educated screw ups. I feel that for anybody to say that tech analysis does not work because the most succesful traders historically have not used it much are in for an awakening. The computer has advanced the knowledge and the art of tech analysis and made it applicable in a way never know to mankind before.
First off, it's LTCM NOT LCRM or whatever. If you are going to put down LTCM at least get its spelling correct. hehe. I'm not for or against LTCM or quants or whatever. Just trying to correct a few things. You wrote, "BTW I know a guy that did regression analyses for LCRM and he says their attempts at price prediction analysis failed them (along with everything else.) He of course, tells me that technical analysis therefore does not work since he has such exposure to quants." Which guy did regression analysis for LTCM? Geez, I'm sure even the most junior junior quants(most them have phds in math, physics, finance) don't need help in regressions. I mean geez, even a high school kid can do regression on Excel. A lot of people like to take a shot at LTCM(including myself at times). But it doesn't disprove quants. It just shows that NO MATTER what methods you used MONEY MANAGEMENT is key. Good strategy and poor management can still bankrupct you. I've seen it. Strategy is only one part(a big part) of the entire trading plan. Until you realize that, you'll always run into the risk of ruin... You can use quant, TA, fundamentals, guts,etc. The only reason why quants command a premium is that their methods can be quantified and certain parameters of the system are known with certain probabilities. Obviously, you can still have a rare 6 sigma event. But risk managers are more comfortable with a trading system that has some known parameters. If you trade from the guts, then it's hard for investors and risk managers to tell where that came from. I saw a double bottom or triple top or 2 headed dragon chasing a rabbit pattern, but oops no I mean I misread it! It was supposed to be the green dog doing a roll-over. I'm not debasing TA, because I use TA every single day and it works to some extent. No technique is perfect. You wrote,"This is kind of a good thing, but look at LCRM and the guy that bankrupted Berings bank, maybe every one of these quants are somewhat of a disaster waiting to happen?" BTW, It's Barings Bank. And that guy is Nick Lesson. He's not a quant. Far from it. I think he dropped out of the university in London or something. And he was just gambling with Barings money. No system, no quantitative methods at all. It was just gut feel and doubling down. NOT that quants are necessarily any better. But just saying that if you are going to pick on people gotta get the facts straight.
...no complain you bash head maxpi. He need bad. He obvious TA delusional, no respect QA, probabry Moonie! Matter not. Prease to exprain green dog roll over. What gender green dog?. Green dog bite? Is fade of well know red dog jump patter? Why green dog roll over, not waysides? Want he belly scratch? Just take Stebe Nissan stickcandles curse. He no tell such patter! You lie! You full it! What misctrader be? Miscellanus? Miscogynist? Miscanthrope? Miscreant? Misconception? Miscegenationist? You tell! Wise other we take full resource gloriousgreaterpanasiatic league, fade you patter all way! You lose money big time. Be sorry you screw head my enemy maxpi! You warn! What zone time you in? Go sreep, up wake better manner.
Quant finance in general is not concerned with predicting the prices or direction of the market. Roughly, you can split quant work into tree parts a) understanding risk - how much, when and how could one loose, what can be done to prevent it. Portfolio theory as well as many other things (VAR, for example) is aimed at that. b) understanding and exploiting statistical irregularities of the market. that includes arb techniqes of varios sorts and even some expoitation of autocorrelation patterns, intersecting with "technical" analysis. High frequency arb funds are a prime example of this technique. c) understanding how to price things and if they are mispriced, collecting on that. this mainly applies to derivatives, especially exotics (i dabble in those). With all of the shortcomings of the quantitative finance, it is here to stay and it will be getting more and more attention as the field develops. These are my 2 cents.