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.