Ease Up on the Quants, Kids

Okay, it was fun kicking quantitative investors — “quants” — for a while, but it’s getting tiresome. For starters, quants aren’t at all monolithic, so the whole category is a bit meaningless. Second, many of those tarred back in August have bounced back in September, so prattling on and on about Goldman’s Global Alpha continuing misadventures is just selective data fixation.

And finally, this isn’t about “stupid trades” (other than maybe in GA’s case) as some are suggesting. It’s much deeper and more interesting that that, having to do with tacit social networks, cheap computing power, over-exploited Compustat databases, vanishing financial biodiversity, and over-crowded strategies that worked surprisingly well for surprisingly long. Turning an important and multi-faceted story into The Attack of the Killer Quants! is shallow and unhelpful.


  1. Aw, come on, Paul. As a class of individuals the hedge fund guys have been simply begging for a good bitch-slapping in the press for years. Scientific and mathematical triumphalism has never been pretty, and is even less attractive when its practitioners have been making more money than God.
    Let us continue to have our fun. I’m sure the hedgies can console themselves for the fact that no-one loves them anymore by buying a couple of Warhols or something. Posers.

  2. Read Demon of Our Own Design by Richard Bookstaber. Quants make money year after year, until they blow up. Great business for them, as they get paid each up year, terrible business for the investors, as they always end up wiped out.

  3. Paul is right. Quant strategies work, but they overplayed them relative to the size of the rents capable of being extracted. My suggestion for them is that they analyze the return potential of the trades that they do, and refrain from trading when they can’t earn the yield on a single-B bond.

  4. “…. for it is the mark of an educated man to look for precision in each class of things just so far as the nature of the subject admits; it is evidently equally foolish to accept probable reasoning from a mathematician and to demand from a rhetorician scientific proofs.”
    – Aristotle, Nicomachean Ethics, BK I, CH 3
    It’s also much deeper in that it reflects the continuing imperialism of scientific ideology. Investing requires judgement which is imprecise and is subject to the emotions of the moment – things that can’t be captured in mathematical formulas. Unfortunately, worshipping at the altar of science people will continue to apply scientific methods to fields to which such methods are inappropriate.

  5. “over-crowded strategies that worked surprisingly well for surprisingly long”
    … until they didn’t.
    I’m beginning to wonder if at the heart, all that’s happening is a kind of moving the risk around into small concentrated periods. Looks great, until payback day comes. Then everything collapses (but, as pointed out above, it’s the investors who lose).

  6. Well, if you’re thinking of telling a Quant where to go, tell them here… QUANTster.com

  7. Assigning blame is easy, analysis is hard. Easy stuff is common, hard stuff is rare and never cheap.

  8. You make a great point, Paul. The quant bashing makes it easier to ignore the more interesting questions of what happened to the quants. None of the articles written about the quant blow up are insightful. Everybody talks about overcrowding but where was the hiccup? Did everybody short the same names? Did the relative strength collective break the quant collective? What really went wrong? Sadly, without a blow up and a rescue we may never know exactly what happened.

  9. Most of the quant traders that I speak to have bounced back. What happened is simple — there was irrational panic in the markets. Investment committees and risk managers made the decision to sell their positions and go flat, in fact at many of the banks and buy-side players these decisions were even made on the same day. So the next day, the market fell even more than the day before. Prices went too far and when people were flat, they had less to worry about. So they started to buy up again all the good and cheap value. Prices started to revert to the mean and those who held on through the confusion saw their positions bounce back.