Rolex quantitative strategies - beware of expensive imitations

Hi,

http://www.battleofthequants.com/agenda.html

I've just returned from the Battle of the Quants having survived a close scrape with a cyborg hedge fund investor sent from the future to melt the markets. Think Gordon Gekko crossed with the Terminator - not a pleasant experience. Now, in all seriousness, some of the claims from the quant strategists to be able to read the future didn't seem much more far fetched than my fictional market cyborg, yet they were adamant at the value they could guarantee to add.

Autoregressive models do have some merit, particularly some of the smarter times series analysis out there, but you're only ever as good as your data, and keeping these models current is tough in chaotic illiquid markets, especially when the markets have just gone through what a chaos mathematician would call a 'phase' change.

Despite this, I don't want to put investors off. If you do your homework and if your quant strategist is willing to pull the curtain back on their methodology, savvy investors will find some good returns in the quant strategy field. However, in this environment you must keep one eye on your exit. When quant strategies get too crowded, exiting with your returns intact can be a precarious business - the Goldman funds debacle of Aug 2007 is well documented and could easily happen again. Furthermore, whenever a strategy meets some degree of success, beware of what the biologists would call 'mimicry'.

For every sound quant strategy out there, you'll also find a manager or two with a poor idea yet the marketing machine to raise capital. This manager effectively gains an advantage by mimicking the successful credible quant players, despite having weak models and a poor idea. With 'black box' strategies still doing the rounds, and with complex lingo coming thick and fast in a world with cash rich investors chasing credible hedge fund managers, dud horses will inevitably be backed.

I can't stress enough for investors to ensure they have some explanation of the strategy employed, in what markets the manager believes it will work (there's no magic bullet for quant strategies, despite what the most bullish of quants may say), and, should returns prove negative, a rapid exit strategy.

You'd never buy a Rolex out of a suitcase on Times Sq, why do the same with your hedge fund investments?

Happy hunting,
Andy