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06.19.12 www.bloombergbriefs.com 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 (www.tikayhaiti.org)
1 2 3 4 5 6 7 8 9 10 11 12
2. “QuantZ - Winner of the Best Quant fund award at the Battle of the Quants 2012”
3.
4.
5. FINalternatives
Published on FINalternatives (http://www.finalternatives.com)
QuantZ Adds 3.9% In Oct., Up 16.45% YTD
Nov 10 2011 | 9:58am ET
QuantZ Capital Management hasn’t lost a step this year as it pushes towards 2012 up by
double-digits.
While many of its peers have suffered some nauseating ups-and-downs over the past
several months, QuantZ's Quark Equity Market Neutral Fund has been a paragon of
consistency, rising 2.46% in August, 2.5% in September and 3.91% in October, leaving
the fund up 16.45% on the year.
"We have reason to believe that, regardless of any year-end seasonal relief rallies, most
traditional 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 deficit
reduction. And, citing several recent studies showing that women make better risk
managers, 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:
http://www.finalternatives.com/node/18704
6. FINalternatives
Published on FINalternatives (http://www.finalternatives.com)
JAT, Citadel, QuantZ Among Top Hedge Funds In '11
Oct 5 2011 | 1:05pm ET
A pair of prominent hedge funds are among the best-performers of the year with just three
months 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% through
Sept. 23.
JAT, which has recently closed its fund to new investors, was up 1.8% with a week to go in
September.
Citadel had more modest monthly and year-to-date returns, but impressive nonetheless. The
Chicago hedge fund giant's 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 now
up 15.1% on the year, Institutional Investor reports.
Also up double-digits this year is QuantZ Capital Management's Quark Equity Market Neutral
Fund, 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 firm's
5.1% year-to-date loss.
Source URL:
http://www.finalternatives.com/node/18293
7. Goldman to Close Global Alpha Fund After
Losses
GOLDMAN SACHS FUNDS STOCK MARKETS EQUITIES FINANCIAL CRISIS RECESSION
SAFE HAVENS INVESTORS BANKING
CNBC.com
| 16 Sep 2011 | 03:21 AM ET
Goldman Sachs Group is shuttering a well-known hedge fund that relies on computer-driven trading strategies
after 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 it
announced a management shake-up at the fund that had been the crown jewel of its quantitative trading
business.
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 other
hedge funds that rely on computer programs to quickly take advantage of opportunities in the market, people
familiar with the number said.
These types of funds are supposed to move quickly in and out of stocks, bonds, currencies and other assets
and exit positions before losses accrue.
This is the second time in four years the Global Alpha fund — once one of Goldman's biggest with $12
billion in assets — has suffered big losses and its performance raises questions about the ability of Goldman
Sachs to manage quantitative strategies for its wealthy clients.
In fact, people familiar with Goldman Sachs have said the company's decision to liquidate Global Alpha
signals 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 Goldman's Global Alpha fund is in the red, most other other quantitative hedge funds are up or
are flat for the year.
The average quant fund is down less than 1 percent over that period, according to performance tracking
service Hedge Fund Research Inc.
Mark Carhart, the man who managed the Global Alpha fund with Raymond Iwanowski for more than a
decade until 2009, has gained 7 percent net of fees this year at his new hedge fund Kepos Capital, a person
familiar with his numbers said.
10. Esma Gregor
Subject: 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
11. 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
12. 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 we
still need quants in the financial industry?
In the 15+ years since Quant Finance programs, such as the pioneering one at
Carnegie Mellon started cranking out financial engineers, Quants have
become entirely indispensable to the Wall St eco-system. The simple math of
fixed income instruments has evolved into the much more complex credit
models of today which attempt to more realistically model the dynamics of
the relevant stochastic variables. Equity trading on the sellside has been
completely transformed due to HFT & algorithmic trading as previously
noted. Risk measurement & management based on complex quant models has
now become the de facto standard. Perhaps the most dramatic changes
underway are on the buyside, where old fashioned fundamental security
selection is being rapidly replaced by quant model/ process driven security
selection & optimization based portfolio construction in order to minimize
drawdowns & enhance risk-adjusted returns. Hedge funds in particular, due
to the use of dynamic leverage, dynamic position sizing & time varying beta
were early adopters of Quant as an “edge”.
The growing complexity of markets as dynamical systems (often on the edge
of chaos of late) & the rapid proliferation of voluminous financial data means
that many traders will have no choice but to evolve into systems architects
who use discretion to manipulate model parameters instead of trying to
manually deal with the incessant information overload. The others will have
to become more proficient at leveraging Quant screens in order to keep from
drowning in the sea of data. Technology as an enabler means that the great
insights of Buffett & Benjamin Graham can be rather trivially plugged into a
Yahoo Finance screen online by a 10th grader with modest effort. On the
other hand, the wide dissemination of such information also chips away at
remaining investment opportunities. While traditional stock investing
techniques have found slim pickings in recent years with exacerbated risks &
outsized drawdowns, even some Quants who got complacent have had to
throw in the towel (note the recent closure of Goldman’s Global Alpha fund).
Factor foresight & nimbleness in terms of judicious tweaking of model
parameters to anticipate shifting regimes along with the copious use of
common 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
13. crisis. That said, any well constructed systematic process is still far more
rigorous & transparent than what might transpire inside a trader’s head
which is the ultimate (& ultimately capricious) blackbox. GIGO (garbage in
garbage out) checks are as important in modeling as they are for real life
cognitive 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 risk
controls & have demonstrably shown that the careful portfolio construction/
optimization inherent to Quant portfolios pays off when the VIX stays
elevated over 30 while traditional deep value investors of the “doubling
down” kind tend to get somewhat battered & bruised. It is noteworthy that
the pension fund behemoths like Calpers are now increasing their allocation
to alternatives while being "underweight" directional equities after having
compounded 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 a
relatively small equity risk premium you have a hard time getting that 7.75”.
Call it Ken Rogoff’s “Second Great Contraction” or Roubini’s “Great
Depression 2.0”, either way, it sure seems we are in the midst of something
far more ominous than a garden variety recession. Should the base case for
Europe ought to be rolling recessions or a depression as the currency bloc
unravels? 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 of
global inter-dependence? What’s going to prop up US equities now that Fed
appears to be out of ammunition & politicians are equating QE with treason?
We repeatedly harped on all of these issues throughout the Fed-orchestrated
contrived QE2 melt-up in Equities. Clearly, at this point enough cans have
been kicked down enough roads in enough countries that one would think
something has to give. Disorderly default/ restructuring remains a significant
risk with the subsequent unraveling of the Euro. The bond market may yet
enforce the truth this time around. A default is a default regardless of the
political euphemism of the day not to mention the inevitable sovereign
downgrades 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 the
macro headwinds & the fact that the world is unlikely to magically heal itself
anytime soon – we have to believe that regardless of any year end seasonal
relief rallies, most traditional (mutual fund) & HF strategies are likely to
disappoint in the decade to come.
A recent Bank of America Merrill Lynch study noted that HF's correlation with
directional equities hit an all-time high in September which means that the
vast majority of HFs continue to offer less alpha than beta. Meantime,
average pair-wise stock correlations being at historically high levels creates a
challenging environment for stock pickers (quant and fundamental alike).
CTAs & Market Neutral funds e.g., Statistical or Vol Arbitrage strategies have
historically flourished in such volatile environments. Not surprisingly, a new
breed of Black Swan funds have emerged. These “tail risk” funds usually load
up on OTM options in anticipation of exogenous shocks. However, they
usually continue to bleed theta till the Black Swan materializes. Arbitrage
strategies embodied by EMN funds typically do not display this problematic
trait since they are inherently long vol without the theta bleed. One can
safely conjecture that the marginal dollar ought to rotate out of directional
4
14. 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
Career
Business Analyst (m/w)
Risikomanagement - MathFinance (Asia) presents its Independent
Quantitativer Fokus, Model Validation Services
Deloitte, Düsseldorf,
Frankfurt, München Charles Brown and Uwe Wystup, the directors of MathFinance
Für unser Team an den (Asia) spent the first week of November to present their
Standorten Düsseldorf, independent model validation services in Tokyo, Singapore and
Frankfurt und München suchen Sydney. In particular, we have validated to pricing of Murex’
wir engagierte Verstärkung. Local-Stochastic-Volatility (LSV) model(See pdf!).
Ihre Aufgaben
Im Spannungsfeld von The FX Options market has taken a clear trend to LSV models in
Mathematik und regulatorischen last few years. While top tier banks have developed their own
Anforderungen erarbeiten Sie für versions of LSV, Murex is the first software vendor to provide an
unsere Mandanten LSV model working on the portfolio level in their risk management
betriebswirtschaftliche Lösungen system.
unter Einsatz von
finanzmathematischen Modellen. The MathFinance team has implemented the pricing tool for first
Sie verstärken unser Quant- generation exotics on its own systems and generated automated
Team, das für quantitative pricing verification using both Monte Carlo and a PDE based
Fragestellungen im Kontext approach. For example, the graph below shows the differences
betriebswirtschaftlicher, between Murex and MathFinance prices for a large set of touch
aufsichtsrechtlicher und
5