Wednesday, July 27, 2016

- Speaking of Journalists....

The WSJ has discovered Quant trading. How ridiculous. It’s nothing really. Steven Cohen (of SAC renown) has contributed a pittance of 250 million to funding a quant platform, not unlike to the 50 or so other quant platforms that are out there right now trolling the grad schools for someone with a unique idea. Big deal.

Here’s a prediction… nothing will come of it. they'll never make any real money on anything like a reliable basis. They suffer under the illusion that the idea itself is owrth something and it really isn't. It's execution of an idea which pays the bills. But Journalists are such idiots that they have to have either a hero, a villain or both in every story.

250 million may seem like a lot of cash, but it isn’t in that space, and it isn’t for Steve Cohen. It’s a hedge. A tiny option on an idea which may be done well by the managers, but is still trolling in wildly over-fished waters. Long dated (more than a few minutes) quant strategies are totally over played in the US market. There is no ‘information content’ in the commonly available data, and the only people making money are the ones who are prepared to take on liquidity risk (which this platform will not) or have access to expensive (as in difficult to obtain or produce) data. That’s it.

The same people that are applying to this platform are probably the same people I was interviewing when I ran quant Equity Trading at my last hedge fund – a hedge fund which, by the way, was about 4 times the size of this brilliant new idea that the WSJ just discovered.

There is really nothing in that story, unless you want to read the comments section for a yuck. Many of these brilliant minds are mentioning long term capital as if that relatively low tech effort invalidates the idea of quant. Or they’re talking about the same things I heard from NYSE floor brokers in 1992 when they said that no computer could ever do their job because there were too many ‘externalities’ that made it too complex for an algorithm. Of course, all those floor brokers (100%) have since been rendered unemployed by trading programs.

The US equity market is no place for a new long dated quant strategy of any type. And the reason is quite simple. That market is too efficient. Absent dividends it’s a zero sum game, and there aren’t enough people losing big money in that market anymore for anyone to make big money. It’s not timing, or sophistication. It’s a stratospheric implied correlation, and the rise of ETF’s that have killed US Equity Quant.

Steve knows that, which is why he only bet 250 million. I’m only mentioning it here because I'm so amazed that the WSJ doesn’t realize it.

1 comment:

MikeCLT said...

I saw that article and thought the same thing, "this is something new?"

Perhaps it is because SAC is a celebrity of sorts and that is why they ran with the story. If our leading business newspaper has succumbed to celebrity worship perhaps we really are doomed.