stories filed under: "quant"
Tue, Aug 21st 2007 5:36pm
Is there a connection between the recent meltdown at quant funds and last week's outage at Skype? Nick Carr makes the provocative argument that both events are the result of what happens when algorithms fail to anticipate behavior that is somehow out of the ordinary. In the case of quant funds, their models failed to anticipate the market's wild volatility, whereas with Skype (if you believe the company's official explanation), the glitch was the result of mass reboots taxing network capacity. Interestingly, both Skype engineers and hedge fund managers were heard using the phrase "perfect storm" to describe the sequence of events that lead to their respective collapses. Of course, as hedge funds learn every few years, these perfect storms that are mathematically supposed to occur just once in a thousand years, seem to happen quite a bit more often. The same goes for any network that suffers an outage despite the best laid contingency plans. The problem is that it's difficult to craft an algorithm or a model that's robust during 'normal' times and abnormal times. In finance, one hopes that the profits are big enough during the good so that you can survive the occasional mess. The one problem, of course, with the comparison between hedge funds and Skype is that Skype's explanation doesn't ring particularly true. The connection between Microsoft patches, mass reboots and the network collapse seems tenuous at best. Thus, it's entirely possible that this particularly outage had nothing to do with abnormal crowd behavior. Still, as the surprise outage at 365 Main demonstrates, it's difficult, if not fully impossible, to completely inoculate oneself against adverse events.
from the all-in-the-data dept
Earlier this year, famed inventor (among other things) Ray Kurzweil announced that he was getting set to launch a new investment company that would employ advanced mathematical techniques to discern patterns in the stock market. Of course, just because Kurzweil is widely considered to be a genius, it doesn't mean he'd have any midas touch when it comes to the stock market. Furthermore, quant funds, as they're known, aren't novel. Lately, in fact, they've been getting slaughtered as the market swings about in unpredictable ways. Top tier investment bank Goldman Sachs has announced that its closing one of its premier quant funds in light of recent losses. Obviously computers have become an indispensable tools in modern day investing, but no algorithm or mathematical genius can guarantee good performance in all markets.