Thursday, August 16, 2007

It's Not a Black Swan; It's a Friggin' Zebra!

Wow. I must quote at length:

"'Wednesday is the type of day people will remember in quant-land for a very long time,' Matthew Rothman, head of quantitative equity strategies for Lehman Brothers told the Wall Street Journal last week. 'Events that models only predicted would happen once in 10,000 years happened every day for three days.' Strangely, these same models failed to predict the once-in-10,000-year events that roiled the markets in 1997, 1998, 2001, and 2002...Several money managers blamed their temporary problems on investors' irrational collective behavior. 'Investor fear has overtaken reason and has induced a period in which most securities have simply ceased to trade,' said Sentinel Management, which sought to halt redemptions of some of its funds this week. And such conditions make it 'virtually impossible to properly price securities or to trade them.' Goldman Sachs CFO David Viniar noted that the firm's decision to inject $2 billion into its ailing Global Equity Opportunities fund 'reflects our collective belief that the value of this fund is suffering from a market dislocation that does not reflect the fundamental value of the fund's positions.' In other words, the losses shown by these funds isn't the fault of the managers, it's the fault of a market that just won't value assets properly. Ironically, you never hear fund managers say that their gains have been unwarrantedly large due to the market's failure to reflect stocks' fundamental value...'We have been caught in what appears to be a large wave of de-leveraging on the part of quantitative long/short hedge funds,' James Simons of Renaissance Technologies said in a letter to investors last week, which sought to explain losses in his highly regarded hedge fund. He also noted that the methodology used by his fund was 'undoubtedly shared by a number of long/short hedge funds.' Goldman Sachs similarly blamed other funds' behavior for its own losses. Of course, the premise of high-end money management is that you don't simply mimic the same investment strategy of 30 other hedge funds. That's why Simons was paid $1.7 billion in 2006."

(KL comes through again. Nice one this time. Very cool.)