Quant Macro Investing

Risk Taking Disciplined

Quant hedgies must fish in fresh waters-Goldman

Tue Dec 1, 2009 1:01pm EST

* Older strategies like value, momentum getting overcrowded

* Eyes newer areas of event-driven, catastrophe reinsurance

By Laurence Fletcher

PARIS, Dec 1 (Reuters) – Computer-driven hedge funds must hunt for new areas to exploit as some areas of making money have become so overcrowded they may no longer be profitable, according to Goldman Sachs (GS.N) Asset Management. Robert Litterman, managing director and head of quantitative resources, said strategies such as those which focus on price rises in cheaply-valued stocks, which latch onto market momentum or which trade currencies, had become very crowded.

Instead he said opportunities could come in areas such as event-driven strategies — which focus on special events such as mergers or restructuring — and catastrophe reinsurance, although he added they can just as quickly disappear.

He also pointed to credit, emerging markets, volatility trading and commodities.

“You have to adapt your process,” Litterman said at the Quant Invest 2009 conference. “What we’re going to have to do to be successful is to be more dynamic and more opportunistic and focus especially on more proprietary forecasting signals … and exploit shorter-term opportunistic and event-driven types of phenomenon.” Computer-driven or quantitative hedge funds attempt to make money by quickly exploiting trends or anomalies in markets such as equities, government bonds or currencies.

However, some funds such as Goldman’s controlled a large share of some markets in summer 2007 and many were caught in a vicious circle of selling. “I think the world has fundamentally changed for quants,” he said, adding that his funds now allocate a greater share of assets to newer strategies since that crisis.

“We’re putting together data that’s not machine-readable, finding databases that haven’t been explored nearly as well as others, identifying linkages across companies and industries and finding patterns in the data that are not as well known.” (To read the Reuters Hedge Fund Blog click on blogs.reuters.com/hedgehub; for the Global Investing Blog click here) (Editing by Jon Loades-Carter)

December 3, 2009 - Posted by | ABCs for Quant

1 Comment »

  1. This article also suggests that trading algos are becoming more and more crowded.

    From CNBC

    “Lotus Capital Management of New York earlier this year realized that a competitor was beating it to a trade it had programmed by exactly 3 microseconds, day after day. The loss meant Lotus was forfeiting about $1,000 in daily revenue on that particular trading strategy.

    Lotus, a quantitative trading firm that uses high-frequency strategies, invested and tinkered, eventually shaving five microseconds from the router and two microseconds from the execution server. “

    Comment by Terence | December 3, 2009 | Reply

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