An Inside Look at Hedge Fund Quants

Minyanville recently interviewed Scott Patterson, staff reporter for the Wall Street Journal and author of The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It. Both the interview and the book provide an eye-opening look at the personalities behind some of the “kings of quant” including Peter Muller of Morgan Stanley, Ken Griffin of Citadel, Cliff Asness of AQR Capital Management, Jim Simons of Renaissance Technologies, and Ed Thorp, who’s consider the “godfather” of quants.

Thorp founded the first quant hedge fund in the 1960s, and is well known for coming up with a mathematical system for beating blackjack, which he wrote about in a book called Beat the Dealer. He later wrote a book on investing called Beat the Market. Many of today’s quant traders are fans of Thorp and have read his books.

Patterson’s own book is a behind-the-scenes look at this arcane corner the hedge fund business, the quants’ impact on the financial crisis, and more recently, their migration into the world of high frequency trading.

Many factors led to the recent subprime-triggered financial crisis, says Patterson. But quant strategies, such as targeted hedging and quantitative risk controls, were instrumental in enabling firms to ramp up their leverage and risk, which set the stage for the massive meltdown.

Patterson doesn’t think quant trading should be banned, by any means. But instead hopes more reform will come from within the quant community.

Are you involved with quantitative trading? What are your thoughts on the direction of the industry? Add your comments below.

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{ 1 comment }

Rocco April 24, 2010 at 4:19 am

“Beat the Market” is a very interesting book written by a very profitable hedge fund manager. There is no exaggeration in saying that for last thirty years Thorp had a better risk-adjusted return than the others in the industry. I strongly feel that If the principles from the book are understood, the execution in different markets becomes apparent.

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