I, Quant

Goldman's Global Alpha fund reported it was down some 26% ytd today. Everyone's making a big deal these days that quant funds are losing lots of money in the current environment because of the inherent instability of the time (quants would say we are having a regime shift). I'm going to give you two competing takes on this chatter.

Some quants would say that this is an opportunity for these quant funds. They will trust their model and return ridiculous amounts when the world returns to normal--when the panic is over the quant funds will prevail. Models can't make money every single day, and there will be statistical anomaly days here and there. The strength of a quant model is that they can avoid the fear inherent in humans and trade into these days to come out victorious on the other end when efficient markets rule.

Others will say that every quant model must have a trader with good market sense there to override the model. When tumulus times like this come around, it is the prerogative of the trader to stop the model and trade the fundamentals. Quant models are meant for calm times to tick away the market discrepancies, but when thing are really moving is when the experienced trader prevails.

I was brought into this world as a quant. I tend to adhere to the "stick to the model" school of thought, but I tend to also make models that have resilience to market shifts like the one we are experiencing now (a couple of my models have been extremely profitable as of late and are covering the losses in some other models easily). I believe Goldman's fund will have a banner year next year or even come roaring back later this year. I do, however, also keep an account for pure macro-economic bets. That also has been very profitable lately. It's all a matter of scaling the right things at the right time. My main indicator in my trades is actually a model that tells me how to weight my risk between tactics.

The age-old adage goes: "Bulls get rich, bears get rich, pigs get slaughtered." Perhaps in this new world we can say "Quants get rich, fundamentalists get rich, pigs get slaughtered." Okay, so you don't get the animal theme, but you get the idea.