Why are quantitative funds losing money these days - best forex trading system free download

Why are quantitative funds losing money these days ~ best forex trading system free download

The New York Times today has an article about several well-known quantitative hedge funds incurring significant losses in recent months. I was quoted in saying that traders running similar quantitative models could contribute to market volatility. This is certainly true if the strategies are trend-following. What puzzles me, however, is that most statistical arbitrage strategies are mean-reverting: they buy during investors panic, and sell during investors euphoria, and should be richly rewarded in this volatile market by providing sorely needed liquidity. And indeed, from my own experience as well as hearing from other traders, mean-reverting strategies are performing very well recently. So where did those losses come from? My guess is that, as I have observed before, many traditional stat arb strategies are getting boring and generating diminishing returns, and therefore many of the quantitative researchers are driven (by their own professional pride or their bosses) to come up with more exotic and higher-return strategies that ultimately may not stand the test of time. For us quants, remembering Occams razor and that our job is to generate returns as opposed to producing brilliant mathematical models is often a hard lesson to learn.
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Hedge funds move to easy to understand liquid strategies - forex trading system secrets

Hedge funds move to easy to understand liquid strategies ~ forex trading system secrets

See this interesting article (registration required) on FT on the state of the hedge fund industry. Paul Tudor Jones, Citadel, and Fortress Investment Group are all said to be moving to "easy-to-understand liquid strategies", otherwise known as "statistical arbitrage".

(By the way, I have been urging traders to do just that in my book.)
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A readers comment on quant funds losses - bank forex trading system

A readers comment on quant funds losses ~ bank forex trading system

A reader of mine (who wish to remain anonymous) pointed out that most of the losses seem to come from low-frequency trading models, while high frequency models continue to perform superbly. This also confirms my own experience. My enthusiasm for high frequency trading was expressed previously here and here.
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An update on why quantitative funds are losing money recently - best forex trading system ever

An update on why quantitative funds are losing money recently ~ best forex trading system ever

A story just came through Dow Jones newswire ("How Black Boxes Became Pandoras Boxes" by Spencer Jakab) suggesting that recent losses are due to factor models gone bad. Given my expressed distaste for such models, that should have been my first guess instead of blaming the "exotic" models!
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Economist article on quant funds - forex trading system book

Economist article on quant funds ~ forex trading system book

The media seems to have an endless fascination with quant funds. Here is the latest article from the Economist magazine, summarizing the postmortem published by several researchers. (Hat tip, once again, to reader Mr. J. Rigg.)

The key points are as follows:

1) Quant funds are now becoming the primary market makers in many securities, which normally would provide liquidity and decrease volatility.

2) Unlike ordinary market makers, however, quant funds are highly leveraged.

3) Because of the high leverage, in the face of large losses these market-making quant funds are forced to liquidate their assets instead of buying them, thus behaving in a way opposite to ordinary market makers just when the need for liquidity is direst.

4) Thus quant funds are actually contributing to instability of the market despite their apparent market-making function.

Fortunately, when all else has gone wrong, there is alway Mr. Bernanke to count on ...
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The social utility of hedge funds - forex trading strategies short term

The social utility of hedge funds ~ forex trading strategies short term

There is an article in the New Yorker magazine profiling Bridgewater Associates, the worlds biggest global macro hedge fund. Inevitably, we come to the awkward question: "If hedge-fund managers are playing a zero-sum game, what is their social utility?"


I thought about this question a lot in the past, and I used to agree with many others that the social utility of hedge funds, or trading in general, is to provide liquidity to the markets. And a good economic case can be made that the more liquid a market is, the higher the utility it is to all participants. However, based on recent experience of flash crash and other unfortunate mishaps, we find out that traders typically do not provide liquidity when it is needed most! So this answer becomes quite unsatisfactory.


In trying to come up with a better reply, I though it is curious that few people asked "What is the purpose of having a Department of Defence?" since wars between nations are typically also zero-sum games, yet we greatly honour those who serve in the armed forces (in contrast to our feelings for hedge fund managers).


To me, clearly the answer with the best moral justification is that, in both cases, there is great social utility in defending either your clients comfortable retirement from financial meltdown (e.g. due to governmental or corporate mismanagement), or in defending your country from foreign aggression. More specifically, the purpose of hedge funds is to reduce long-term volatility in your clients net worth. (I would like to say "reduce risks to your clients net worth", but that would be a bit too optimistic!) 


I emphasize long-term volatility, because of course trading generates a lot of daily or hourly volatility in your clients equity. But I do not believe that such short-term volatility affects ones life goals. On the other hand, a 3-or-more-year drawdown in a typical buy-and-hold portfolio can wreck havoc with many lives.

If one day, the markets become so quiescent that few hedge funds can generate higher Sharpe ratio than a buy-and-hold portfolio (as indeed seems to be the case with the US equities markets these days), then yes, most hedge fund managers should just quit, instead of hogging intellectual resources from our best universities.

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