The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It
Page 37
Statistical arbitrage: A trading strategy in which computers track the relationships between hundreds or thousands of stocks and implement trades based on those relationships. The computers look for periods when the long-term relationship breaks down and makes bets that the relationship will revert back. The strategy was first deployed by a computer programmer, Gerry Bamberger, at Morgan Stanley in the 1980s. It quickly became one of the most powerful and popular trading methods ever devised, helping launch the giant New York hedge fund D. E. Shaw and others. Peter Muller at Morgan Stanley’s Process Driven Trading was one of the most adept stat arb traders. The strategy imploded in the quant crisis of August 2007.
Acknowledgments
A cast of thousands, it seems, helped me with this book, including a multitude of unnamed sources behind the scenes who explained the inner workings of these highly secretive investors. My agent, Shawn Coyne, helped bring the idea to life and deserves enormous credit for helping develop it. My editor, Rick Horgan, and his gifted associate editor, Julian Pavia, had a wealth of ideas that gave a healthy kickstart to the book when it needed it. Mitch Zuckoff was an ideal sounding board and provided fantastic insights into how to put the book together and make the ideas understandable. Thanks to my editors at The Wall Street Journal, particularly Jon Hilsenrath and Nik Deogun, who encouraged my interest in writing about this strange group of traders; and Anita Raghavan, who helped me crack open the quant group at Morgan Stanley. A virtual army of traders and professors helped me better understand the world of the quants, including Mark Spitznagel, Nassim Taleb, Paul Wilmott, Emanuel Derman, Aaron Brown, Benoit Mandelbrot, and so many others. Ed Thorp devoted far too much time to help me understand the true nature of trading and risk management, as well as his own amazing career. As promised, I’d like to thank ANONYMOUS. Mostly, I thank my wife, Eleanor, whose understanding, patience, and constant encouragement over the past few years made this book possible.
Copyright © 2010 by Scott Patterson
All rights reserved.
Published in the United States by Crown Business,
an imprint of the Crown Publishing Group,
a division of Random House, Inc., New York.
www.crownpublishing.com
CROWN BUSINESS is a trademark and CROWN and the Rising Sun colophon are registered trademarks of Random House, Inc.
Library of Congress Cataloging-in-Publication Data
Patterson, Scott, 1969–
The quants : how a new breed of math whizzes conquered Wall Street and nearly destroyed it / Scott Patterson.
p. cm.
1. Quantitative analysts–United States. 2. Investment advisors–United States. 3. Stockbrokers–United States. 4. Investments–Mathematical models–History. 5. Finance–United States. I. Title.
HG4928.5.P38 2009
332.64092’273–dc22 2009028511
eISBN: 978-0-307-45339-6
v3.0