Here are some links for this week –
Post-August 2007, everyone seems to be saying that the age of quants and quant-based hedge funds are over and other such dire doomsday predictions. Even the bigwigs lost a good bit of money and people are probably more than a little wary of quant-based hedge funds at the moment.
But here is the question — was it really quantitative trading that did them in or was it the fact that they were leveraged beyond redemption?
Sure, part of the quantitative strategy involved some rather convoluted leveraging, but I think that the important thing to keep in mind is that a lot of the ones that failed were ones that were heavily-leveraged. Similarly, there were a lot of quant-based hedge funds that were not as heavily leveraged that did rather well.
While it may take a while for the landscape to clear out and settle, it is worth considering that quant-based hedge funds may not necessarily be a bad thing. But leveraging, as we’ve seen, can even bring down the greats.
Thoughts?
Taleb defines a Black Swan as something that is an extremely rare event. When 9/11 happened, that was a Black Swan — a ten sigma or worse. When LTCM collapsed and the feds had to engineer a bailout, that was a Black Swan.
Now, the way quant hedge funds have operated is that when things went wrong for one firm, the odds were that its effected would be diluted by better performance from others. Usually, the odds of a lot of firms being affected by the same problem are rather low and consequently, their effects on the economy would be limited as well.
HFN asks an interesting question in this regard — what are the chances of several hedge funds blowing up in this regard?
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