The Quants, the new book by Wall Street Journal reporter Scott Patterson, comes amidst the barrage of books attempting to dissect the crisis. Patterson focuses partial blame on a cadre of hedge-fund managers, Ph.d. types who over the past two decades developed well-known quantitative-trading methods.
They happen also to frequent the same social circles, distract each other by playing each other in high-stakes poker matches, and grew up and learned quantitative finance from some of the same professors and mentors.
Patterson provides a soft argument that these groups of traders (mathematical and computer experts with degrees in finance, economics or even physics) helped contribute to the financial crisis. He doesn't, however, provide a detailed proof--the kind that they (the Quants themselves) would appreciate if presented with polished, mathematical logic.
So don't read this book if you wish to (a) learn as much as possible about quantitative trading methods, (b) understand the direct links between some well-known finance theory (efficient markets, Black-Scholes options models, etc.) actual market behavior and (c) tap into the trading models and secrets that helped many of them make whopping amounts of money before the crisis.
The book is not a how-to or a thorough analysis of how exquisite financial models went awry. But the book is not necessarily a waste of time.
It's more a dissection of the cast of characters who were significant trading participants during the market collapse in 2008-09. It's almost up to the reader to determine whether the "characters" contributed to the collapse, took advantage of the collapse, or were victims of their own forms of market trading, trading based not on gut hunches and hubris, but on models, theories and black boxes. Patterson refers often to the models' recurring search for the "truth" in how markets are supposed to behave.
Hence, Patterson summarizes a few of the theories behind the models without scaring off the non-MBA or non-Ph.d. reader. He pays more attention to the hedge-fund traders' emotional roller-coasters, their innate drive to get models to present the "truth" correctly, and their stubborn confidence and devotion to their black boxes. He also describes their boldness and courage to take risks, tack on leverage, and stick with their models even when markets tell them they might be wrong.
Among the countless hedge-fund managers and quant types on Wall Street or in Greenwich, Connecticut, Patterson focuses on a few: Notably, Peter Muller at Morgan Stanley, Ken Griffin at Citadel, Cliff Asness at AQR, and Boaz Weinstein at Deutsche Bank. He shows how they are connected in many ways. They meet up in the same Poker-playing circles. They had some of the same professors at University of Chicago. And they watch, study, and follow study each other and sometimes learn from others.
In the book, we see less about how Griffin at Citadel grew obnoxiously rich from trading convertible bonds, more about how he was a hot-tempered, demanding, sometimes near-abusive manager of a fund that went through a near meltdown during the crisis.
We see less about how Asness at AQR had been a master at statistical-arbitrage trading, more about how he suffered during the 2008 collapse, going through episodes of destroying desktop computers or isolating himself in his office trying to understand why markets didn't behave they way he said they should or would.
Thus, the book is more a summary of how primary players in hedge funds battled their way through the crisis. Years from now, the book won't stand out among the dozens of crisis tales recently published. It can be regarded as a chronicle of survival from the vantage point of a handful of highly regarded quants.
Tracy Williams
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