This document is being provided for the exclusive use of <>      06.19.12  www.bloombergbriefs....
“QuantZ - Winner of the Best Quant fund award at the Battle of the Quants 2012”                                           ...
FINalternativesPublished on FINalternatives ( Adds 3.9% In Oct., Up 16.45% YTDNov 10 ...
FINalternativesPublished on FINalternatives (, Citadel, QuantZ Among Top Hedge Funds In ...
The new turmoil at Global Alpha comes almost four years to the day after the fund lost 22.5 percent inAugust 2007, during ...
  0.25.11  	 1                                                                                            hedge funds | Bl...
Esma GregorSubject:                 FW: MathFinance Newsletter w photo                              you cannot view this n...
in Equities the investment industry remains utterly paralyzed in   terms of dealing with the grim new reality. The simple ...
unadulterated positives for both the retail & institutional investor         alike & have greatly enhanced market efficien...
crisis. That said, any well constructed systematic process is still far morerigorous & transparent than what might transpi...
strategies towards better Sharpe ratios in non-directional strategies like                                    EMN/ Statist...
QuantZ Media (June 2012)
QuantZ Media (June 2012)
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QuantZ Media (June 2012)


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QuantZ Media (June 2012)

  1. 1. This document is being provided for the exclusive use of <>  06.19.12 Bloomberg Brief | Hedge Funds 12 Spotlight QuantZ Capital’s Milind Sharma on Applying a ‘Macro Overlay’ to Quantitative Investing a slow, gradual thing? in the higher order effects, namely what Milind Sharma, CEO of New York-based A: We’re really betting on the second does that do to vol and dispersion and QuantZ Capital Management Ltd., spoke order effects. Regardless of whether you stock correlation and all those things. to Bloomberg’s Nathaniel Baker about his have the big event or not, it’s going to be The macro stuff translates directly into views on the global macro picture and how the fact that in the last couple of years a big unwind because there’s no ways to these are incorporated into his hedge fund’s you’ve seen record high stock correla- strategy. get rid of the debt instantaneously. The real issue near term is whether Angela tion. That makes it very difficult for a Merkel and Europe can take a page fundamental, bottom-up stock picker to Q: Your fund was in the top 3 percent in out of our history book from Alexander outperform. The other issue is that when the Bloomberg database last year and Hamilton’s experience and apply it to Eu- you’re in a sideways to downward bear recently won the Battle of the Quants. rope. Even if they do, it’s difficult to see market, the typical long/short process What’s the strategy, exactly? how the world can magically heal itself. doesn’t work well. Because most long/ Because we’re still looking at a potential short funds are essentially levered beta A: We’re ‘quantamental,’ which means hard-landing scenario in China, India’s riders. They see a rally, they load up and a hybrid of quantitative-driven on the not in great shape with inflation, the jump on. Not to mention that with the securities selection side with some macro Japanese have plenty of their own debt pressure on expert networks and Reg adjustment/macro overlay, if you will. to worry about and are only 23 years into FD it’s gotten much harder for many of their bear market, and we’re 13 years into these managers to do what they used Q: Quantamental. I like that. How does ours. We see the ‘lost decade’ in stocks to do. Plus, with the relative volume in the macro overlay work? – not the one that just happened, but ETFs rising dramatically, you’ve got an A: It’s taking our house view and environment where a process-driven the one that’s likely to come – to act like combining it with a regime-switching ap- strategy can tweak the right levers to a dampened oscillator. This means that proach. Basically forecasting probabili- take advantage of these issues. each successive episode of quantitative ties, which then drive the portfolio tilt easing will be less and less effective. As and overall portfolio orientation. There’s Q: Isn’t there a lot of upwards/down- an example, this is the third year in a row a lot of moving parts. wards/sideways movement as we go that we’ve seen a very serious déjà-vu script playing out; you get a very strong along here? Q: So what are your macro views then? first quarter, market peaks in April or A: Exactly. In general, one should expect A: We sound like a broken record in May, then you get a summer swoon. For much higher volatility and correlation in terms of our perma-bearish outlook but the third year in a row we’ve been justi- these bear market cycles. That’s some- that’s because frankly we see either a fied in being cautious that once the sugar thing a quant process can take advantage ‘checkmate’ or a ‘stalemate.’ We don’t high of quantitative easing wears off, the of. We for instance are always implicitly see any great scenarios that can come same script plays out. What I’m saying is long vol/long dispersion. But we can out of this massive deleveraging cycle. that at some point you’re going to have choose to be long correlation/short cor- We’re in the camp of this being a great an episode of QE perceived not as a relation by tweaking our ratio bets on stagnation/deflationary bust or secular license to melt up, but as sheer despera- idiosyncratic versus common factor risk. bear market. tion on part of the Fed. Q: I think you just lost me. Q: What are your big concerns? It Q: How are these views translated into A: It’s very difficult for fundamental man- sounds like this goes beyond Greece your strategy exactly? How does that agers to even measure their idiosyncratic and European sovereign debt? mechanism work? versus common factor levels, much less A: That’s right. All of the above plus of A: As I mentioned we’re more interested take advantage of that. course the domestic issues: your fiscal cliff, the $46 trillion of unfunded liabilities, trying to solve the debt overhang with more debt and the possibility of a disor- Age: 40 derly default or disorderly decline in one of the major reserve currencies. At the College/University/Grad School(s): Oxford, Vassar, Carnegie Mellon, Wharton end of the day, we believe that enough Professional Background: MLIM, ran proprietary stat arb portfolios at RBC cans have been kicked down enough roads in enough countries that some- and Deutsche Bank AG, the latter under Boaz Weinstein. thing’s got to give at some point soon. Mentors: Boaz Weinstein; Bob Doll, vice chairman of BlackRock. Q: Will this be a big event or more like Charitable Work: Ti Kay Haiti (  1 2 3 4 5 6 7 8 9 10 11 12 
  2. 2. “QuantZ - Winner of the Best Quant fund award at the Battle of the Quants 2012”   
  3. 3. FINalternativesPublished on FINalternatives ( Adds 3.9% In Oct., Up 16.45% YTDNov 10 2011 | 9:58am ETQuantZ Capital Management hasn’t lost a step this year as it pushes towards 2012 up bydouble-digits.While many of its peers have suffered some nauseating ups-and-downs over the pastseveral months, QuantZs Quark Equity Market Neutral Fund has been a paragon ofconsistency, rising 2.46% in August, 2.5% in September and 3.91% in October, leavingthe fund up 16.45% on the year."We have reason to believe that, regardless of any year-end seasonal relief rallies, mosttraditional and hedge fund strategies are likely to disappoint in the decade to come,"QuantZ wrote, citing continuing troubles in Europe and the U.S. deadlock on deficitreduction. And, citing several recent studies showing that women make better riskmanagers, the firm unveiled a new motto, of sorts: "No cowboy acts. Trade like a girl."QuantZ has had only two down months all year, January and July.Source URL:
  4. 4. FINalternativesPublished on FINalternatives (, Citadel, QuantZ Among Top Hedge Funds In 11Oct 5 2011 | 1:05pm ETA pair of prominent hedge funds are among the best-performers of the year with just threemonths to go in 2011.JAT Capital Management and Citadel Invest Group are both up by double-digits this year,according to published reports. The former may be the best of all, having returned 37.4% throughSept. 23.JAT, which has recently closed its fund to new investors, was up 1.8% with a week to go inSeptember.Citadel had more modest monthly and year-to-date returns, but impressive nonetheless. TheChicago hedge fund giants flagship Kensington and Wellington funds rose 0.25% last month,buoyed by their global equities strategy, which rose 2.35% on the month. The two funds are nowup 15.1% on the year, Institutional Investor reports.Also up double-digits this year is QuantZ Capital Managements Quark Equity Market NeutralFund, which rose 2.5% in September and is up 11.85%.Others were not so lucky: Greenlight Capital added 0.2% on the month. But neither that gain—nor the fact that Greenlight was up, marginally, in the third quarter—can distract from the firms5.1% year-to-date loss.Source URL:
  5. 5. Goldman to Close Global Alpha Fund AfterLossesGOLDMAN SACHS FUNDS STOCK MARKETS EQUITIES FINANCIAL CRISIS RECESSIONSAFE HAVENS INVESTORS| 16 Sep 2011 | 03:21 AM ETGoldman Sachs Group is shuttering a well-known hedge fund that relies on computer-driven trading strategiesafter the portfolio rang up a hefty loss this year.Goldman told investors in the roughly $1.6 billion Global Alpha fund the news on Thursday, one day after itannounced a management shake-up at the fund that had been the crown jewel of its quantitative tradingbusiness.The fund will be closed in the next few weeks.Global Alpha had tumbled 13 percent by early September, delivering a far worse performance than otherhedge funds that rely on computer programs to quickly take advantage of opportunities in the market, peoplefamiliar with the number said.These types of funds are supposed to move quickly in and out of stocks, bonds, currencies and other assetsand exit positions before losses accrue.This is the second time in four years the Global Alpha fund — once one of Goldmans biggest with $12billion in assets — has suffered big losses and its performance raises questions about the ability of GoldmanSachs to manage quantitative strategies for its wealthy clients.In fact, people familiar with Goldman Sachs have said the companys decision to liquidate Global Alphasignals its decision to exit quantitative hedge fund strategies altogether.The firm still manages billions in quantitative mutual funds. Goldman Sachs declined to comment.Even though Goldmans Global Alpha fund is in the red, most other other quantitative hedge funds are up orare flat for the year.The average quant fund is down less than 1 percent over that period, according to performance trackingservice Hedge Fund Research Inc.Mark Carhart, the man who managed the Global Alpha fund with Raymond Iwanowski for more than adecade until 2009, has gained 7 percent net of fees this year at his new hedge fund Kepos Capital, a personfamiliar with his numbers said.
  6. 6. The new turmoil at Global Alpha comes almost four years to the day after the fund lost 22.5 percent inAugust 2007, during the early days of the financial crisis.Those losses prompted investors to pull money out.Even though the funds performance steadied with a 4 percent gain in 2008 and raced ahead with a 30 percentincrease in 2009, assets never recovered.By the time Carhart and Iwanowski left in 2009, the fund had shrunk to $4 billion from its $12 billion peak.Soon after the pair retired, assets shriveled further to about $2 billion. The fund neither gained nor lost moneylast year, delivering a zero return. The quantitative group has been beset by departures for some time.More than two dozen left this year alone, people familiar with the numbers said.On Wednesday, Goldman Sachs Asset Management sent a letter to Global Alpha investors notifying themthat Katinka Domotorffy, the head of the groups quantitative investment strategies, would retire at years end.The letter, a copy of which was obtained by Reuters, did not discuss the poor performance of the GlobalAlpha fund.Deja Vu AgainWhat may have hit the Goldman fund especially hard were the unexpected stock market sell offs in earlyAugust and recent currency market fluctuations in the wake of the Swiss National Banks decision to halt therise of the Swiss franc, people familiar with the funds models said.Andrew Schneider, president and CEO of Global Hedge Fund Advisors, said the first half of September hasbeen brutal for some large hedge funds, due to unpredictable moves in market direction."The volatility has been so high; if youre wrong, especially if youre using margin or leverage, your returnsare going to be extremely poor," said Schneider.Other quantitative hedge funds, however, fared better.James Simons Renaissance Technologies Renaissance Institutional Equities fund has gained more than 25percent this year, said a person familiar with the fund run by the math professor turned hedge fund manager.Another quant fund, QuantZ Capital Management, for instance, is up 12.8 percent through Sept. 6, accordingto a letter sent to investors.© 2011 CNBC.comURL:
  7. 7.   0.25.11  1 hedge funds | Bloomberg Brief 2Returns in Brief■■ Fortress Investment Group LLC’s Commodities Fund LP was down 5 basis points Hedge Fund Returnsin September, according to a letter to investors obtained by Bloomberg. “Gains were Bloomberg BAIF indices, which represent all fundsmade primarily in short metals and energy positions, offset by losses incurred in our tracked by Bloomberg data, are the source of thelong gold and corn positions,” William Callanan, the fund’s chief investment officer, below hedge fund and fund of funds data.wrote in the letter. Hedge Funds Funds of Funds S&P 500 2-Year Treasuries (Merrill Lynch Total Return Index) 15.06%■■ Tiburon Holdings LLC, the New York-based event-driven fund that has $50 mil-lion in assets, has gained 4 percent this year, according to a person familiar with the 8.18%matter. The fund is run by Peter Lupoff, a former portfolio manager at MillenniumPartners LP. Tiburon started in November 2009. 3.90%* 2.47% 1.36%■■ MAST Capital Management LLC’s Credit Opportunities I fund returned 1.7 per- -8.68% -0.89% -1.03%cent in September, its fifth straight month of positive returns, to bring year-to-date 2010 total returnsperformance to 6.64 percent, according to a letter to investors that was obtained by 2011 YTD total returnsBloomberg. Gains in the fund’s long CDS book, “as well as both special situation *from Feb. 26, 2010single name bond and equity shorts,” drove gains, the letter said. The fund is man-aged by David Steinberg. Bloomberg Brief Hedge Funds■■ QuantZ Capital Management’s Quark Equity Market Neutral Fund gained 4.7 per- Newsletter Ted Merzcent through Oct. 17, bringing year-to-date returns to 17 percent, according to a letter Executive Editor tmerz@bloomberg.netto investors, a copy of which was obtained by Bloomberg. The New York-based fund is 212-617-2309managed by Milind Sharma. Bloomberg News Rob Urban —Compiled by Kelly Bit and Nathaniel E. Baker Managing Editor 212-617-5192 Hedge Funds Nathaniel E. BakerFor this week’s Performance Snapshot, featuring distressed hedge funds, see page 10. Editors 212-617-2741returns by strategy Melissa Karsh Strategy 2010 September 2011 2011 year-to-date 212-617-4557 Reporter Kelly Bit Mortgage-Backed Arbitrage 24.6 -0.2 13.0 212-617-1097 Equity Statistical Arbitrage 3.4 0.6 7.3 Contributing Katherine Burton Fixed Income Arbitrage 3.7 0.6 3.7 Reporters 212-617-2335 Short-Biased Equities 7.2 3.2 3.4 Saijel Kishan Emerging Market Debt 13.3 -1.1 2.8 212-617-6662 Contributing Matthew Kelly Capital Structure Arbitrage 2.1 -1.3 2.8 Data Editors 609-279-5064 Directional Fixed-Income 5.3 -0.4 2.7 Anibal Arrascue Convertible Arbitrage 2.7 -0.2 2.5 609-279-5084 Market-Neutral 5.5 -1.7 2.0 Newsletter Nick Ferris Business Manager 212-617-6975 Multi-Strategy 4.0 -0.8 1.9 Advertising Long/Short Equities 5.8 -3.4 1.8 212-617-6975 Reprints & Lori Husted Merger Arbitrage 3.7 -1.7 0.8 Permissions 717-505-9701 CTA/Managed Futures 1.7 0.3 -0.6 To subscribe via the Bloomberg Professional Terminal type BRIEF <go> or on the web at Global Macro 4.4 -0.5 -0.9 Distressed Securities 12.0 -3.1 -1.4 © 2011 Bloomberg LP. All rights reserved. This newsletter and its contents may not be Long-Biased Equities 5.3 -3.5 -6.1 forwarded or redistributed without the prior consent of Bloomberg. Please contact our reprints andSource: Bloomberg Hedge Fund Indices permissions group listed above for more information.Type HFND<GO> to view return statistics   1  2  3  4  5  6  7  8  9  10  11  12  13  14  15 
  8. 8. Esma GregorSubject: FW: MathFinance Newsletter w photo you cannot view this newsletter please click here Newsletter | 15 Nov 2011 | Issue 263 In this issue Editorial Interview with Milind Sharma, CEO, QuantZ Capital § Editorial Management § Company News Mr. Sharma is Chief Executive Officer, QuantZ Capital Management. He ran the LTMN desk in Global Arbitrage & Trading at RBC where he served as Portfolio Manager for Quant EMN. In his capacity as Director § News & Senior Proprietary Trader at Deutsche, he managed Quant EMN portfolios of significant size & contributed to the broader prop mandate in Cap Structure Arb & with LBOs. Prior to that he was co- § Upcoming Events founder of Quant Strategies (previously R&P) at BlackRock (MLIM). Prior to MLIM, he was Manager of the Risk Analytics and Research Group at Ernst & Young LLP where he was co-architect of Raven (one § Career of the earliest derivatives pricing/ validation engines) & co-created the 1st model for pricing cross-currency puttable Bermudan swaptions. § Resources Amongst the first to receive a degree in Financial Engineering from the pioneering MSCF program at Tepper (Carnegie Mellon), Mr. Sharma has a dual MS in Applied Math from CMU where he was also in the PhD program. His publications have appeared in the Journal of Investment Management, Risk, Wiley, HedgeQuest, World Scientific, Elsevier etc. and he is a frequent speaker at conferences. Milind, you are an experienced fund manager with a quantitative background, where do you see the current trends in the investment industry in NY? Clearly the investment industry is witnessing a radically new paradigm driven by tectonic shifts which need to be acknowledged first before they can be effectively dealt with: 1.De-bunking the “stocks for the long run” thesis & its “buy & hold” corollary which have turned out to be disastrous in recent years is critical in light of the fact that the S&P500 has gone nowhere fast for some 13 years now. For perspective, it took 25 years for the S&P to reclaim the Sept 1929 highs. Japan aside, there are a number of countries where Beta one i.e. long only investing has been a fool’s game. Given the post-WWII period of prosperity (of which the US was the prime beneficiary), this inductive fallacy tantamount to stocks having the God given birth- right to go up in the long run became the accepted wisdom. Even after a lost decade & faced with potentially another lost decade 1
  9. 9. in Equities the investment industry remains utterly paralyzed in terms of dealing with the grim new reality. The simple reason for this seemingly inexplicable paralysis is that the vast majority of professional investors, allocators & retail individuals grew up wired inherently “long biased”. Shorting stocks/ hedging is rather more difficult & requires much greater quantitative wherewithal than most participants of the eco-system have had at their disposal, not to mention that it pre-supposes a re-wiring of the industry mind-space.2.Alpha vs. Beta & closet Levered Long Beta riders: Coming out of denial about the fallibility of “stocks for the long run” thesis allows us to abandon the Beta one default position with respect to various asset classes. The housing market collapse of recent years has shown that even the American dream of home ownership was not immune to the forces of financial gravity. Inflation adjusted Real Estate has in fact been a lousy long term investment in the developed world contrary to popular misconceptions. The archetypal “hedge” fund of Alfred Jones was supposed to be “hedged”. Sadly, most long-short Equity managers fail miserably in Bear markets because of their inability to monetize alpha on the short side since most are far from hedged. The data shows that LS Equity HF managers are mostly “closet” Long-biased Beta chasers (analogous to their “closet” index hugging Mutual Fund brethren) who tend to lever up long when they sense a rally coming. Given the scant evidence in support of market timing prowess, it appears that many fundamental managers have simply granted themselves the license to gamble. This often results in stomach-churning drawdowns which cannot be justified based on any sensible risk framework. Needless to say, when the VIX remains elevated for a period of time (2008 & 2011 to wit) with sideways to downwards churn, this approach fails. Allocators can choose to be more discerning & refuse to pay 2 & 20 for mere Beta access (which should only cost 5 to 10 bps given the availability of index ETFs). After all, even cab drivers have great stock tips to offer during raging bull markets. It is only when the tide goes out that we get to know who is swimming naked.3.Regulatory hurdles to putative fundamental alpha: By now we all know that US regulators have done a mighty fine job of prosecuting the insider trading cabals of Galleon & SAC alumni. More important for investors to take note of is the prosecution of expert networks & the fundamental Long-Short clientele who were heavily reliant upon such “expertise”. Noah Freeman’s (SAC alum) damning testimony regarding the use of expert networks should put a chill on supposedly standard industry practices amongst fundamental managers. In light of that, one can’t help but notice the interestingly coincidental timing of SAC’s Quant fund launch. The better known fundamental stock pickers now aspire to be Quants? The changing landscape for fundamental Long-Short based on recent developments is reminiscent of what transpired post Reg-FD which brought an end to the incestuous peddling of information between management & the Street.4.High Frequency Trading: HFT & the onslaught of algorithmic trading has dramatically reshaped the equity landscape. The manifold compression of bid/ ask spreads, reduction of commissions almost to zero & increased liquidity are all 2
  10. 10. unadulterated positives for both the retail & institutional investor alike & have greatly enhanced market efficiency. Alas, the media spin on these remarkably positive developments has been remarkably negative for the simple reason that most of the talking heads on TV are the old timers who either don’t get it, are too innumerate to get it or belong to the disgruntled masses dis- intermediated by the onslaught of algorithmic trading. Let’s not forget that the much revered “specialist” in the old system in fact turned out to be the ultimate frontrunner (by virtue of being the human backstop with access to the order book). Despite the indictment & successful conviction of NYSE specialist firms, we continue to hear buyside managers reminisce blissfully as to how great the old system was (back when they paid obscenely large commissions as opposed to the putative evils of HFT). Alas, the industry remains woefully in denial about the paradigm shifts in the making. How important are Quants and who uses quantitative models? Do westill need quants in the financial industry?In the 15+ years since Quant Finance programs, such as the pioneering one atCarnegie Mellon started cranking out financial engineers, Quants havebecome entirely indispensable to the Wall St eco-system. The simple math offixed income instruments has evolved into the much more complex creditmodels of today which attempt to more realistically model the dynamics ofthe relevant stochastic variables. Equity trading on the sellside has beencompletely transformed due to HFT & algorithmic trading as previouslynoted. Risk measurement & management based on complex quant models hasnow become the de facto standard. Perhaps the most dramatic changesunderway are on the buyside, where old fashioned fundamental securityselection is being rapidly replaced by quant model/ process driven securityselection & optimization based portfolio construction in order to minimizedrawdowns & enhance risk-adjusted returns. Hedge funds in particular, dueto the use of dynamic leverage, dynamic position sizing & time varying betawere early adopters of Quant as an “edge”.The growing complexity of markets as dynamical systems (often on the edgeof chaos of late) & the rapid proliferation of voluminous financial data meansthat many traders will have no choice but to evolve into systems architectswho use discretion to manipulate model parameters instead of trying tomanually deal with the incessant information overload. The others will haveto become more proficient at leveraging Quant screens in order to keep fromdrowning in the sea of data. Technology as an enabler means that the greatinsights of Buffett & Benjamin Graham can be rather trivially plugged into aYahoo Finance screen online by a 10th grader with modest effort. On theother hand, the wide dissemination of such information also chips away atremaining investment opportunities. While traditional stock investingtechniques have found slim pickings in recent years with exacerbated risks &outsized drawdowns, even some Quants who got complacent have had tothrow in the towel (note the recent closure of Goldman’s Global Alpha fund).Factor foresight & nimbleness in terms of judicious tweaking of modelparameters to anticipate shifting regimes along with the copious use ofcommon sense remain a virtue. There is validity to the criticism of over-reliance on blackbox strategies back-tested on yesterday’s data & the last 3
  11. 11. crisis. That said, any well constructed systematic process is still far morerigorous & transparent than what might transpire inside a trader’s headwhich is the ultimate (& ultimately capricious) blackbox. GIGO (garbage ingarbage out) checks are as important in modeling as they are for real lifecognitive biases. Much can be said for the hybrid approach. With the financial debt crisis in mind, where would you invest?Challenging markets like 2008 & 2011 showcase the benefits of rigorous riskcontrols & have demonstrably shown that the careful portfolio construction/optimization inherent to Quant portfolios pays off when the VIX stayselevated over 30 while traditional deep value investors of the “doublingdown” kind tend to get somewhat battered & bruised. It is noteworthy thatthe pension fund behemoths like Calpers are now increasing their allocationto alternatives while being "underweight" directional equities after havingcompounded only 3.41% in the past five years (woefully short of their 7.75%bogey). Joe Dear (Calpers CIO), noted that with “low interest rates and arelatively small equity risk premium you have a hard time getting that 7.75”.Call it Ken Rogoff’s “Second Great Contraction” or Roubini’s “GreatDepression 2.0”, either way, it sure seems we are in the midst of somethingfar more ominous than a garden variety recession. Should the base case forEurope ought to be rolling recessions or a depression as the currency blocunravels? How many European banks will fail by the time all is said & done?What are the chances that the European crisis can be contained in this age ofglobal inter-dependence? What’s going to prop up US equities now that Fedappears to be out of ammunition & politicians are equating QE with treason?We repeatedly harped on all of these issues throughout the Fed-orchestratedcontrived QE2 melt-up in Equities. Clearly, at this point enough cans havebeen kicked down enough roads in enough countries that one would thinksomething has to give. Disorderly default/ restructuring remains a significantrisk with the subsequent unraveling of the Euro. The bond market may yetenforce the truth this time around. A default is a default regardless of thepolitical euphemism of the day not to mention the inevitable sovereigndowngrades across the globe as we work our way through this massive de-leveraging cycle. The renewed domestic bi-partisan bickering as the Super-committee deadline approaches in the US is no more reassuring. Given themacro headwinds & the fact that the world is unlikely to magically heal itselfanytime soon – we have to believe that regardless of any year end seasonalrelief rallies, most traditional (mutual fund) & HF strategies are likely todisappoint in the decade to come.A recent Bank of America Merrill Lynch study noted that HFs correlation withdirectional equities hit an all-time high in September which means that thevast majority of HFs continue to offer less alpha than beta. Meantime,average pair-wise stock correlations being at historically high levels creates achallenging environment for stock pickers (quant and fundamental alike).CTAs & Market Neutral funds e.g., Statistical or Vol Arbitrage strategies havehistorically flourished in such volatile environments. Not surprisingly, a newbreed of Black Swan funds have emerged. These “tail risk” funds usually loadup on OTM options in anticipation of exogenous shocks. However, theyusually continue to bleed theta till the Black Swan materializes. Arbitragestrategies embodied by EMN funds typically do not display this problematictrait since they are inherently long vol without the theta bleed. One cansafely conjecture that the marginal dollar ought to rotate out of directional 4
  12. 12. strategies towards better Sharpe ratios in non-directional strategies like EMN/ Statistical Arbitrage which can still thrive in a world where the positive slope of the security market line can no longer be taken for granted (hence the assumed positive drift term for the stochastic process being modelled). What do you think about the occupy movement? For those of us who actually work in the immediate vicinity of Wall St, the OWS protests have been significantly disruptive. At first, it was difficult to take this amorphous expression of discontent seriously given that the protests did not have a clear agenda or a coherent, well-articulated message. However, the cognoscenti in the form of the Stiglitz’s, Krugman’s & the Jeffrey Sachs’ have taken it upon themselves to articulate their message & lend the movement much credibility. The message has been transmogrified into one representing the "screwflation" of the 99% (to borrow from Doug Kass). This social unrest is symptomatic of the structural unemployment, a moribund housing industry, the mortgage mess, the lingering effects of the credit bubble & most importantly it is a backlash against the income disparities that came about from capitalistic excesses of recent decades. How we work towards a self-sustaining economic recovery to address these issues will depend in large part upon enlightened policy initiatives that get us to escape velocity. However, this is easier said than done. After all, the Keynes versus Hayek debate rages on a century later. Thank you for your insights, Milind, we hope to speak again soon. Uwe Wystup Managing Director of MathFinance Company News CareerBusiness Analyst (m/w)Risikomanagement - MathFinance (Asia) presents its IndependentQuantitativer Fokus, Model Validation ServicesDeloitte, Düsseldorf,Frankfurt, München Charles Brown and Uwe Wystup, the directors of MathFinanceFür unser Team an den (Asia) spent the first week of November to present theirStandorten Düsseldorf, independent model validation services in Tokyo, Singapore andFrankfurt und München suchen Sydney. In particular, we have validated to pricing of Murex’wir engagierte Verstärkung. Local-Stochastic-Volatility (LSV) model(See pdf!).Ihre AufgabenIm Spannungsfeld von The FX Options market has taken a clear trend to LSV models inMathematik und regulatorischen last few years. While top tier banks have developed their ownAnforderungen erarbeiten Sie für versions of LSV, Murex is the first software vendor to provide anunsere Mandanten LSV model working on the portfolio level in their risk managementbetriebswirtschaftliche Lösungen system.unter Einsatz vonfinanzmathematischen Modellen. The MathFinance team has implemented the pricing tool for firstSie verstärken unser Quant- generation exotics on its own systems and generated automatedTeam, das für quantitative pricing verification using both Monte Carlo and a PDE basedFragestellungen im Kontext approach. For example, the graph below shows the differencesbetriebswirtschaftlicher, between Murex and MathFinance prices for a large set of touchaufsichtsrechtlicher und 5