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Read The Quants PDF - How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It by Scott Patterson Crown Business. By Jesse S Hixson; Scott Patterson, The Quants: How a New Breed of http:// medical-site.info investment world. On many trading floors, quants are gaining respect, clout and money as computer system. Journal reporter Scott Patterson.
The quants applied those same breakthroughs to the highly practical, massively profitable practice of calculating predictable patterns in how the mar- ket moved and worked. That was for the di- nosaurs of Wall Street, the Warren Buffetts and Peter Lynches of the world, investors who focused on factors such as what a company ac- tually made and whether it made it well.
That night at the St. They were celebrating their dominance of Wall Street, just as junk bond kings such as Michael Milken had ruled the financial world in the s or swash- buckling, trade-from-the-hip hedge fund managers such as George Soros had conquered the Street in the s. Muller flicked a lock of sandy brown hair from his eyes and snatched a glass of wine from a passing tray, looking for his friends.
A few nonquants, fundamental investors of the old guard, rubbed el- bows with the quant crowd that night. David Einhorn, the boy-faced manager of Greenlight Capital so named when his wife gave him the green light to launch a fund in the s , could be seen chatting on a www. Just thirty-seven years old, Einhorn was quickly gaining a reputation as one of the sharpest fundamental in- vestors in the business, putting up returns of 20 percent or more year after year.
Grave dancer of the hedge funds, Citadel was known for sweep- ing in on distressed companies and gobbling up the remains of the bloodied carcasses. But the core engines of his fund were computer- driven mathematical models that guided its every move. Does he ever smile? The guy wants to be king of everything he touches.
Asness, like Muller, Griffin, and Simons, was a pioneer among the quants, having started out at Goldman Sachs in the early s.
Muller was obsessed with poker, had been for years. The quants ran the private poker game, but more traditional in- vestment titans joined in. Lasry was known for being a cool investor whose icy de- meanor belied his let-it-roll mentality.
And won. Asness, a stocky, balding man with a meaty face and impish blue eyes, wore khaki pants and a white tee peeking out from his open col- lar.
He winked, stroking the orange-gray stubble of his trimmed beard. The year before, Asness had been the subject of a lengthy and glowing profile in the New York Times Magazine. He was a scourge of bad practices in the money management industry, such as ridiculously high fees at mutual funds. And he had the intellectual chops to back up his attacks. Known as one of the smartest investors in the world, Asness had worked hard for his success.
His ego had grown along with his wallet, and so, too, had his temper. While outsiders knew Asness for his razor-sharp mind tempered by a wry, self-effacing sense of humor, inside AQR he was known for flying into computer-smashing ram- pages and shooting off ego-crushing emails to his cowed employees at all hours of the day or night.
By , Chriss was quietly building a cutting-edge quant machine at a giant hedge fund called SAC Capital Advisors, run by the eccentric and reclusive tycoon Steve A. They looked for the fourth member of their private poker game, Boaz Weinstein. Just thirty-three, Weinstein was head of all credit trading in the United States at Deutsche Bank, the German behe- moth. The team had already gained fame in the bestseller Bringing Down the House and was soon to get the Hollywood treatment in the movie There were plenty of casinos, none better than the one he played in every day from his third-floor office in downtown Man- hattan.
Asness whistled and cleared his throat. The players soon got down to business. A melodic chime sum- moned stragglers into the main room, where vested dealers waited behind scattered rows of card tables, fresh decks arrayed in wide rain- bows before them. The action was cor- dial on the surface, cutthroat between the lines. It was a charity event, after all. Muller, Asness, Griffin, and Weinstein were all quants.
Math was the very air they breathed. Even the custom-made poker chips at the event were stamped with the names of mathematical river gods such as Isaac Newton. But the guys he was playing against were insane about poker. Muller had been frequenting poker halls since the s during his days as a young quant in Berkeley, California. He played online poker obses- sively and even toyed with the bizarre notion of launching an online poker hedge fund.
Weinstein, more of a blackjack man, was no slouch at the poker table, having won a Maserati in a NetJets poker tournament. Griffin simply hated to lose to anyone at anything and approached the poker table with the same brainiac killer instinct that infused his day-to-day trading prowess.
No matter how hard they might play elsewhere, no poker game mattered more than when the gamblers around the table were their fel- low quants. It was more than a battle of wits over massive pots—it was a battle of enormous egos. Each had his own particular strategy for beating the market. Griffin specialized in finding cheap bonds through mathematical for- mulas, or, via the same logic, cheap, down-on-their-luck companies ripe for the picking.
Asness used historical tests of market trends going back decades to detect hidden www. Weinstein was a wizard with credit derivatives—securities whose value derives from some underlying asset, such as a stock or a bond. Weinstein was especially adept with a newfangled derivative known as a credit default swap, which is essen- tially an insurance policy on a bond. Regardless of which signature trade each man favored, they had something far more powerful in common: an epic quest for an elusive, ethereal quality the quants sometimes referred to in hushed, reverent tones as the Truth.
The Truth was a universal secret about the way the market worked that could only be discovered through mathematics.
Revealed through the study of obscure patterns in the market, the Truth was the key to unlocking billions in profits. The quants built giant machines— turbocharged computers linked to financial markets around the globe—to search for the Truth, and to deploy it in their quest to make untold fortunes.
The bigger the machine, the more Truth they knew, and the more Truth they knew, the more they could bet. Think of white-coated scientists building ever more powerful devices to replicate conditions at the mo- ment of the Big Bang to understand the forces at the root of creation.
It was about money, of course, but it was also about proof. Each added dollar was another tiny step toward proving they had fulfilled their academic promise and uncovered the Truth.
The quants created a name for the Truth, a name that smacked of cabalistic studies of magical formulas: alpha. Alpha is a code word for an elusive skill certain individuals are endowed with that gives them the ability to consistently beat the market. It is used in contrast with another Greek term, beta, which is shorthand for plain-vanilla market returns anyone with half a brain can achieve.
To the quants, beta is bad, alpha is good. Alpha is the Truth. If you have it, you can be rich beyond your wildest dreams. The notion of alpha, and its ephemeral promise of vast riches, was everywhere in the hedge fund world. The trade magazine of choice for hedge funds was called Alpha. A popular website fre- quented by the hedge fund community was called Seeking Alpha. Sev- www. Asness named his first hedge fund, hatched inside Goldman in the mids, Global Alpha.
In their day jobs, as they searched for the Truth, channeling their hidden alpha nerds, the quants were isolated in their trading rooms and hedge funds. At the poker table, they could look one another in the eye, smiling over their cards as they tossed another ten grand worth of chips on the table and called, looking for the telltale wince of the bluffer. Sure, it was a charity event.
But it was also a test.
Skill at poker meant skill at trading. And it potentially meant something even more: the magical presence of alpha. As the night rolled on, the quants fared well. Muller chalked up victories against Gowen and Cloutier in the early rounds. I think I show I have a pretty good understanding, and I doubt anybody had ever written as much about Renaissance as this book.
So who knows about that, Medallion is 40, 45 percent a year, since Somehow they figured out the machine-learning systems that they were using were applicable to financial markets. I always thought that was something that made him special, although clearly a little confirmation biased, knowing his track record. What was your takeaway with Ed Thorp, did you get to meet him? A: Yeah, I met Thorp many times.
So he was totally fascinating. Q: Not about the money, but rather just demonstrating that a rule-driven, systemic approach to uncertain probabilistic systems can generate alpha.
I thought it was so fascinating, this guy who came out of this world, this MIT math world, hanging out with Claude Shannon, ended up becoming really the first quant fund. It was just this pervasive thing that really took off, and I never really thought he got the credit he deserved as being this monumental figure on Wall Street.
I think most people have never heard of Ed Thorp. A: Right, Jim was also a student and teaching at MIT at about the same time that Ed Thorp was teaching there, and they have connections with information theory and code-breaking and things like that.
Q: They seem to be somewhat parallel, although Simons comes to the market somewhat later than Thorp does. A: Right. The sense I got from reading through a lot of the book was all these guys, brilliant mathematicians, very clever guys, they pretty much had almost identical trades on.
Is that a fair statement? A: Yeah, it was a crowded trade, as they say. Q: And so we see a lot of things start to take place.
But it seems really smart guys with an ability to check for errors seemed to have just closed their eyes and jumped off the building. They had months where they were down a couple of percent… A: Cliff and AQR had been through a near-death experience in and in when the tech bubble was going up, because their models accurately predicted that all of these crappy dot-com stocks were worthless, and they were just going up and up, and they were shorting those things, so it was just killing them.
They were months if not weeks from going under, so they had actually gone through a period where models were not working, they came out of it and it confirmed for Cliff that even if you hit a rough patch, things will come back, just stick it out. Q: Any of the other quants have similar experiences? Q: And their holding period is much, much shorter.
A: A very short holding period, so if the market is going up, and this is one of the great things about statistical arbitrage, is it has never failed in the history of the market until August This book came out in early When did you hand the manuscript in?
A: I handed it in in late Q: And it was a year later?
A: Yeah. Q: Were you pulling your hair out and wanting to add stuff? So I was chasing to try to keep up with the story and changing the manuscript constantly, and I turned it in, and the editors wanted me to re-write it, because I turned in this really long thing with a cast of thousands, and I wrote about the CDO stuff in depth, and a lot of other hedge funds, I had far more extensive chapters on D. Shaw, and they wanted me to focus. A: I was shooting for that, which obviously I was trying to bite off more than I could chew.
Q: But the focus is terrific, you tell the story of the build-up and the collapse through the mathematical models, through the personalities. A: And they all know each other, too. Did anybody blow up, did anybody recover?