Quant Macro Investing

Risk Taking Disciplined

Goldman Claims Momentum And Value Quant Strategies Now Overcrowded, Future Returns Negligible

Goldman Claims Momentum And Value Quant Strategies Now Overcrowded, Future Returns Negligible

Even as momentum buyers keep driving the market to new 2009 highs today on a worse than expected ISM numbers (more Obamoney coming), none other than Goldman Sachs head of quant strategies Robert Litterman says that with everyone on the same side of the trade in momentum and value quant strats, the returns to these strategies are rapidly becoming negligible due to overcrowding. Of course, what happens when the crowds disperse is anyone’s guess, although if Obama had anything to say about it, the exit would be cool, calm and collected. Obviously it will be anything but. And very limited upside also means very unlimited downside. Yet let he who wants to fight the Marriner Eccles lunatics cast the first short.

More from 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 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.

That’s all we need: computers trading on event situations, where the first three letters of the headline will be sufficient to throw any thinly traded stock into a parabolic rise or drop. Whatever happened to good old fashioned humanitarian trading?

Yet isn’t it ironic that none other than Goldman which lost billions in August 2007 when the quants went haywire most recently, should be warning about the dangers of overcrowded groupthink?

“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.”

Yeah right, things are so different than August 2007, when insane parabolic melt ups each and every day were so unique and so completely different to those from… today. The poetic justice of Goldman’s trading P&L imploding after several “unique” haywire strategies end up losing the firm a cool couple of billion will be unsurpassed. Not only that, but the statistical garbage that is GS’ VaR will finally be exposed for the sham mathematical artefact it is. Until then we can all wait and hope.

December 7, 2009 - Posted by | Uncategorized

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