The problem with being public is that your dirty underwear gets exposed, and if you are an investment bank, that means you have to talk about embarrassing losses.
Morgan Stanley announced that it lost $390 million in a single day in August. And of course, it was those pesky quant traders. And even worse, Morgan Stanley wound up fessing up after other firms had already disclosed their losses, meaning all the really good rationales were already taken.
From Bloomberg:
Morgan Stanley, the world’s second- biggest securities firm, said its quantitative strategy traders lost $390 million during a single day in August as their computer models failed to account for “widespread” investor selling.
The company’s traders lost money on 13 days during the quarter ended Aug. 31, the New York-based firm said in a quarterly regulatory filing today. “The largest loss days resulted from losses associated with quantitative strategies in early August 2007, when these strategies were adversely affected by widespread portfolio reductions,” the company said.
So this announcement said the models only allowed for markets that would go up.
Morgan Stanley needs to fire either its quants or its corporate communications staff.
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fire the quants! aren’t you being a bit harsh?
let me say why i think you are bieng a bit harsh. granted there are many quants who follow the models blindly and program away and really are not that good but, hey, it works in the normal times.
but also there are many good quants who know very well the limits of the models and all about fat tails and that these 100,000 year events happen once every 5 to 10 years historically.
the thing is that is these good quants spend time trying to learn from history and model volatility in these events (a very tough, but extremely interesting problem, but it can be done and the more time they happen, the more data to mine)
to try to learn to loose less money or even win some during them, they don’t get rewarded for it. they get paid for making money quarter to quarter.
now i find this attitude incredibly stupid, if someone has access to the data and burns neurons and silicon chips on this, there is a lot of opportunity to be ready for a rainy day.
this was nassim taleb’s idea an he had a fund to make money in those events. unfortunately these events are too sporadic for this to really net you money if you only concentrate on this events only as investor don’t have enough patience. this is what happened to nassim’s fund. but if one has fund with both strategies, it would be a winner, or a the very least if the environment gets too hairy less of a looser. it’s a possible strategy to win or to limit losses at worse.
i am not talking out of my posterior, i am a physicist with plenty of experience in statistical physics which is very similar to standard models use by quants for security option valuation, and as a hobby i like to keep myself semi informed of the happenings in finance
I was being humorous, but I gather that doesn’t always work in print. I did not say “fire all the quants,” I said fire the Morgan Stanley quants, based on the official justification of their performance. If you read the announcement literally, the models weren’t designed to deal with “unexpected selling.” When may I ask is selling expected? No one has a perfect crystal ball.
If the explanation were accurate (instead of what is more likely true, that the corporate flacks didn’t go a very good job), then firing those quants would seem pretty reasonable.
ooops. sorry i didn’t catch the humor. not enough coffee today!