Book Review: The Quants

As an employee in a moderate sized financial services firm whose pruimary clients are hedge funds, Scott Paterson's "The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It" is an extremely entertaining read on the topic.  The industry has gotten progessively more complicated as brilliant math students graduated from top-class colleges and began gathering capital for their strategies.  The book vaguely discusses the different quantitative investment funds including AQR, Rennaissance Technologies, Citadel Group, Deutsche Banks' SABA and Morgan Stanley's PDT fund, and all of its key personel. 

It opens with a discussion of Ed Thorp, whose interest in investment was sparked by his passion for arbitrage opportunities in gambling, but went on to create the first convertible bond arbitrage fund.  This strategy focuses on pricing inefficiencies between common stock and derivatives, warrants in Thorp's case.  The strategy encourages shorting the overvalued of the pair, while simultaneously going long on the undervalued of the pair.  As the inefficiency is detected by other market participants it will converge and Thorp would make money as equilibrium returned.  Losses would be hedged because both securities would likely move in tandem.

The most important thing for Thorp's strategy was risk management.  He understood that many of his wagers had only a 55% chance of success, which seems small, but over the long term can be infinitely profitable.  However, the % of capital invested in each position has a direct impact on the risk of ruin due to short term bad luck.  He discovered the Kelly criterion, which he used in his blackjack strategy was an appropriate tool for determining "bet sizes."  Many believe the crash was a result of firm making wagers of a size far higher than Kelly would suggest, by used leverage.  The profitability of these strategies has fallen as more particpants understand and enter the market, but even if all positions had a 60% chance of success, a short term down swing from equilibrium can easily cause a devastating loss if the bet size is too large.

My only critiques of the book were that it was not techincal enough for my tastes as an insider, but I believe the level of sophistication and detail was appropriate for an outsider.  Also many of the story lines felt a little overly fantastic, although not neccessarily exagerated by the author.  I felt a lot of the parallel story lines were recycled and I believe the layout of content had room for improvement.



I really enjoyed mention of the poker influence on the industry including mention of famed degenerate TJ Cloutier and Jen Harmon.  Tales of high living such as "models and bottles" are always nice as well!

CT Flow

In honor of the George Costanza post on Nerd Fitness (a fine blog, that I totally recommend). Instead of putting it off, I am going to update the blog today. I have a lot of new things going on in my life, a new job, a new apartment, and new food plan/philosophy. The new job is going extremely well. All though, working in finance, there is a lot of technology and complex procedures to follow. It is only my second week, but I think that I am making progress and beginning to understand the method to the work that we do. People at the new job seem very friendly and outgoing, although it is that corporate, sterile friendliness, for the most part. The benefits/salary of the job are better than what I was receiving at the last company, but the company is many times smaller, although that does not affect me much on a day to day basis.

I also moved to a new apartment in Enfield, CT. Enfield is a large suburban town on the northern edge of Connecticut, abutting Longmeadow, MA. It is on the east bank of the majestic Connecticut River, and is considered more of a suburb of Springfield, MA than of Hartford, CT. Growing up in Massachusetts, its comfortable to know that I am only 7 miles from the largest city in Western Mass. The town used to be a carpet producing area, but due to globalization, most of these businesses are long defunct. Several of the buildings have been repurposed into apartment buildings, which is where I am living now. Although it has much more of a standard or even hotel feel than my last place (a 4 family in Quincy, MA) not to mention $100 more per month in rent. I am really enjoying it. The space is open and feels much larger, the appliances are modern, bathroom is massive, walk-in closet is superb, and the details (exposed brick, 12 ft ceilings) are great touches that are only possible based on the buildings heritage. Some cons are that it is carpet throughout the living room and bedroom, and the cabinets are a bit awkward in the kitchen.

My primal eating plan (links) is going very well. I have been at it almost a month, and am definitely noticing some results. I have been sticking to the no carb, low sugar, high fat, high protein principles as well as I can, with several cheat meals and more beer than I care to admit. To that end, I have decided to make the month of September beer-free. I still have a bunch of great beer courtesy of my generous uncle, who brought some local favorites out from Michigan. Including Bell's Two Hearted, which I would buy by the case if it were available locally and Founder's Reds Rye PA, which is extremely tasty as well. However, for the month of September, my only alcohol will be several bottles of wine. Hopefully, I can buzz down to New England Brewing in New Haven before the end of the month to grab a growler of their beer, Ghandi Bot if available. For this weeks meals, I made a quiche to eat for breakfast with mushrooms, peppers, onions, broccoli and bacon. 3 pieces of sirloin and 10 sausages accompanied by copious amounts of frozen spinach, broccoli, cauliflower, and carrot topped with olive oil. Some nuts and peanut butter for snacks and coffee and seltzer to drink along with plenty of h2o.

Old Orchard Beach

I spent the past 3 days at Old Orchard Beach in Maine. A very small honky-tonk town, just south of Portland. There were a number of members of my mother's family there, including distant cousins and my grandparents who made the trip up from Florida. I got a pretty viscious sunburn, as we spent a lot of time by the beach and pool, during the 100 degree heatwave! Important to me, I was able to drink a lot of great beers. First night I was there, I walked a mile up to the nearest location selling Baxter Brewing Co's Stowaway IPA. A very solid canned offering, available only in Maine, at 8.99 a 6er, it was a bargain. It reminded me very strongly of New England Brewing Co's Sea Hag IPA.

Thursday, we made our way up to Portland to tour the Allagash Brewery. I went with my father and uncle, who are curious about craft beer, but not very knowledgeable. We toured the facilities, which are very impressive, and since the tasting room/retail store was under construction, we had a tasting in the barrel room of the brewery. We had Allagash White, Tripel, Curieux (Tripel aged in Jim Beam bourbon barrels) , and 2011 Fluxus (Bier de Garde). I enjoyed all of the beers, as well as the very informational tour, best of all it was free. I did not pick up any beer there, but I regret not grabbing a piece of glassware.



After that, we stopped at Whole Foods Market, Portland, and I was able to grab 2 bottles of Maine Brewing Co. Lunch IPA ($5.99/500ml bottle), with a lot date of 7/21 which was the day we were in the store! Pretty crazy stuff! I enjoyed one bottle that night, and just had another one last night, after the restaurant. Incredibly hoppy, but still very drinkable and refreshing, one of the hoppiest "single" IPAs I have had in some time. Highly reccomend all of Maine Brewing Co's offerings!

Paleo Diet

Have been fairly busy with life, as I am no longer working at my job, and working hard to find a new one. My wife, Marina, is going to be a Francis Perkins scholar at Mount Holyoke in Western Massachusetts, north of Springfield, starting in September, so we are looking to move from the Boston area out that way, roughly a 2 hour drive. Springfield and its neighbor to the south Hartford, CT are certainly not financial powerhouses, that Boston is, but I still have some hope in finding a new job in my chosen field. Hartford is an insurance hub, and where there is insurance, there is asset management, and CT is the home of hedge funds, so both of these industries offer a number of opportunities. As far as lodging, we are looking primarily in the RT 91 corridor, south of Springfield, ideally in Longmeadow or East Longmeadow, although the Forest Park neighborhood of Springfield would be agreeable as well. I will update with more information as I come across it!

Personally, I have been trying to stick to the Paleo Diet, which focuses on eating as our ancient hunter/gatherer ancestors did. A diet primarily of meat, regional vegetables, and the nuts and seeds that we could find. The main difficulty is that grains are uniformly prohibited, and fats are to be used as an energy source, rather than carbs. Conventional Wisdom here and everywhere in the modern world says that grains should make up the majority of one's diet, but the Paleo diet, and myself take offense with that. The gluten and lectins found in grains, as well as the high carbohydrate and sugar content found in the average American diet, is certainly fattening and at worst potentially dangerous to one's health. I don't mind giving up breads, pasta, and rice, but beer is something I love, and has gluten and is mostly carbs. I have decided to limit myself to a MAXIMUM of 3 craft beers, and preferably less on days when I drink. Fortunately, red wine is allowed in small quantities, so I may shift my consumption to the nectar of the grape.

There are a number of great resources on the Paleo diet, but my favorite is Mark's Daily Apple and Nerd Fitness, both great blogs that are easily readable and the authors are likable. Check them out for their free content, as well as the premium content they offer if you are so inclined (I DO NOT RECEIVE ANYTHING FROM THESE GUYS, I JUST DIG THEIR STUFF)

Look forward to some healthy meal updates, as well as more beer/wine reviews when I get an income again!