Back in the summer of 2007, while the housing market was imploding but apparently nobody knew it (certainly not the chairman of the Federal Reserve Board, the Treasury Secretary or Jim Cramer,) a number of shadowy hedge funds suddenly started melting down. It happened very quickly. Billions were lost amid the first tremors of what would become the housing implosion and credit crisis, and people started to hear a new phrase to describe these shadowy firms: the Quants.
Scott Patterson, a veteran Wall Street Journal reporter, explains these firms, the power they amassed and the damage they did, in his new book, “The Quants.” It comes out Feb. 2, although Amazon is taking orders now.
In the interest of full disclosure, I should mention I’ve know Scott since I first arrived at Dow Jones in 1997, so he’s an old friend. He’s also one of the sharpest guys in the newsroom, and a first-rate writer as well. The guy’s smart enough to get to the heart of the story and honest enough to tell the plain truth.
Here’s an excerpt, from the Journal:
At Morgan Stanley’s investing powerhouse Process Driven Trading on Monday, Aug. 6, founder Peter Muller was AWOL, visiting a friend near Boston. Mike Reed and Amy Wong manned the helm, PDT veterans from the days when the group was nothing more than a thought experiment, its traders a small band of young math whizzes tinkering with computers like brainy teenagers in a cluttered garage.
On Wall Street, they were all known as “quants,” traders and financial engineers who used brain-twisting math and superpowered computers to pluck billions in fleeting dollars out of the market.
Instead of looking at individual companies and their performance, management and competitors, they use math formulas to make bets on which stocks were going up or down. By the early 2000s, such tech-savvy investors had come to dominate Wall Street, helped by theoretical breakthroughs in the application of mathematics to financial markets, advances that had earned their discoverers several shelves of Nobel Prizes.
PDT, one of the most secretive quant funds around, was now a global powerhouse, with offices in London and Tokyo and about $6 billion in assets (the amount could change daily depending on how much money Morgan funneled its way.) It was a well-oiled machine that did little but print money, day after day.
That week, however, PDT wouldn’t print money—it would destroy it like an industrial shredder.