Are Quants Dead?

Posted on Mo 27 August 2007 in misc • 2 min read

  • Random tags: [] meta: _aioseop_keywords: Subprime, Quantitiative, Hedge Funds, Quant, Investing dsq_thread_id: '181042078' author:

    In my personal opinion, no. As long as there is market inefficiency, there will always be some quantitative strategy out there trying to capitalize on it. Some people believe, because of recent market events, that the quantitative based investment strategy will likely go away. That might be true for some quantitative hedge funds who got caught with their pants down but not for whole of the industry. If it did, then I'd be out of business! After all, modeling market trends using neural nets is very quantish indeed!

    The difference between the failed hedge funds and what I do is that I'm always concerned about risk and realize that in high volatile times, the markets tend to go against your position and your models get out of whack. My guess is that those troubled funds did think about risk but maybe didn't or couldn't quantify all of it.

    I previously wrote,

    Quantitative models are fallible in turbulent markets because they can’t adapt fast enough to changing conditions. Their fallibility lies in the mathematical analysis that assumes turbulent markets can be rationally modeled. Everything works fine as long as the market operates fairly smoothly and during low volatile periods.

    I believe this 100% true but the markets do return to "order" after a period of high volatility. Its then that those remaining models start to magically work again. They cycle repeats itself as money pours back into those funds and every works again until the next shake out. The trick for the survivors is to prepare for the next shake out, create a plan to deal with it, and carefully understand and manage your risk. If history serves as a guide, chances are the majority won't and there in lies your opportunity.

    My guess is that we're just seeing the cusp of market volatility, the subprime mess isn't over yet...