By: GZ on Domenica 26 Agosto 2007 04:35
un capitolo del libro appena uscito sui "quant" i trader di modelli matematici computerizzati che ora dominano il mercato
di questa gente si parla solo quando hanno qualche piccolo guaio, ma quando vanno bene non senti niente, per cui ci si fa l'idea errata che queste cose non funzionino, in realtà negli ultimi dieci anni sono cresciuti in modo esponenziale
'How I Became a Quant'
By Barry Schachter and Richard R. Lindsey
August 22, 2007
Chapter 14, by Clifford S. Asness, Managing and Founding Principal, AQR Capital Management, LLC
On Our Own
We decided to leave Goldman Sachs at the end of 1997. By this time, it was definitely "we," as I made this decision along with my current partners David Kabiller, Bob Krail, and John Liew. This decision was based partially on simple ambition and greed (anyone who starts a hedge fund and doesn't admit this motivation probably shouldn't be trusted with your money), but also because our responsibilities at Goldman were too broad. Besides running $7 billion in client assets, we were also the general quant group for GSAM, doing efficient frontiers if the marketing group needed them, asset liability analysis if a client requested it, and many other tasks that were not directly about research and portfolio management. That was not consistent with our desire to focus solely on managing client money. We started our firm AQRCapitalManagement, LLC (Applied Quantitative Research) in early 1998 for all these reasons.
We launched our first hedge fund in August of 1998 with $1 billion of new capital, the largest standing start we had heard of for a hedge fund at that time. Why did we launch with a hedge fund when we had run both traditional and hedge fund assets at Goldman Sachs? Well, there's a paradox to this industry. To attract traditional assets, you need a five-year track record, some gray hair on your team, and it does not hurt to have the solidity of a Goldman Sachs behind you. To attract hedge fund assets you only need to be 29 years old and say that you are closing. Of course I'm being too flip. For starting either one a great track record, pedigree, and investment process are crucial. However, the strange difference in difficulty between starting a hedge fund and a traditional firm is quite real.
So we launched with a billion of hedge fund assets in August 1998, and today have about $35 billion in assets, about $9 billion in hedge funds, and about $26 billion in long-only beat-the-benchmark mandates. Describing it that way makes it sound like way too smooth a path. I am fond of describing our first 20 months as "We launched with 1 billion, and then through diligence, hard work, and some astute market calls, we turned that into 400 million in under two years." Then I wait for the realization that this is far less! An attentive reader might note that we launched in August 1998. Because the massive quantitative (I will dispute that characterization later, but for now it works) hedge fund Long-Term Capital (LTCM) blew up that August, that surely accounted for our problems. That is a perfectly reasonable inference, but incorrect. August of 1998 was actually a good month for us. Our problems were the next 19 months, as the end of the LTCM crisis pretty much kicked off the great technology/Internet bubble. This was not a good time for us. The title of the next section could very well be altered to "How I Barely Stayed a Quant."
Basically, in a nutshell, for our first year and a half, momentum was a good strategy, but value (for picking stocks and stock markets) was disastrously bad. Given our process incorporates both, we didn't have quite as tough a period as pure value, but it was pretty tough! Accepting that tough times will happen is part of the job, but when it happens in your first year and a half in business, and you are taking 20 percent annual volatility, and you are truly market neutral in a time of markets soaring (so it's not just losing, it's posting negatives relative to others soaring!), I assure you it's not pretty.
We fought very hard to preserve our business. We made the case time and again to clients in private presentations that our drawdown was statistically not that shocking a result given our volatility and market neutrality (we had a triple-digit gross return year at Goldman), and more importantly, that we thought we were right and due to make a lot of money when things corrected. I also made the case publicly in a series of bitter, sarcastic presentations and papers, all sharing a common title "Bubble Logic." Please note I use the words bitter and sarcastic in their traditional complimentary fashion.
After many publications over the years, "Bubble Logic" is still my favorite work. It is rare you get to take an extreme stance on a first-order issue to the world's wealth, get it right, and try to be entertaining while doing it. Ironically, it is one of the few pieces I never got published, as I wanted to make it into a book. It was about 50 single-spaced pages, too short for a book, but too long for an article, and as the bubble started to come down and we started to do well I tried updating it a few times, but "get out now" is much more interesting than "you should have gotten out a year ago," so eventually I relented and moved on.
In addition to making our case, we did make some changes in both our fund and our business. We researched and implemented new strategies and launched some new funds and long-only business lines. Perhaps most important to survival and most disappointing in retrospect, we cut our original fund's target volatility from 17 to 20 percent to 12 to 14 percent. Truth be told, we actually cut by more like half as we moved to some more conservative, and I think more accurate, assumptions about volatility and correlation amongst strategies. Had we not lowered our risk, it's questionable whether we would've survived, but it's not questionable that had we survived, we would have made clients a lot more than the already big gains we produced over the next few years!
Most importantly though, we stuck with our basic process, and did not waver on our strong belief that our value strategy was epically attractive, and in fact we increased the proportion of our risk (not our total risk) that came from our value-based stock selection bet. This, needless to say, worked out quite well over the next few years.
Let me pause for a blatant suck-up paragraph (it may be sucking up, but it is also true). Most of the $1 billion we raised was locked up for only one year, and our drawdown hit bottom at 19 months long. We could not have stuck with anything if we did not have a world-class set of clients who by-and-large believed in us, believed the world was crazy (or at the least that it paid to have a hedge on the possibility the world was crazy). In some cases, our clients actually added to their investment with us near the bottom. We offered existing clients the high-water mark of departing clients. This meant that if they invested new money with us, we wouldn't take a performance fee until we had made back our large since-inception losses, even though those losses had occurred for other departing investors. At even the most optimistic of scenarios, with the power of compounding working against us, this meant we would be working with no hope of a performance fee for at least a few years. While we fully expected this offer to pay off for us, we also felt it was a nice gesture to the clients that had stuck with us through the hard times. Of course, even with this enticement it still required great courage on our clients' part to participate, and I will be forever grateful for having clients who believed in us through this very bleak time. Thank you.
Finally, the worst of times in your life can sometimes end up as the times you look back on with the most pride. So it is with the bubble that began in earnest nearly to the day we started AQR. I'm proud of sticking with and upping our bet on value while many caved to the mob. I'm proud of how hard, and how successfully, we fought to keep our clients. I'm very proud of how we retained our employees and kept our partnership (if not my sanity at all times) intact. Most generally, we kept alive and ultimately made flourish, a hedge fund that was massively down over its first 20 months. That's just not supposed to happen in the hedge fund world. Besides us, you can count the hedge funds that opened out of the gate down significantly for an extended period of time and survived and thrived using no fingers and no toes (if I've missed a major example I apologize). It just might be our proudest achievement.
Another thing that makes our firm somewhat different has been our long-standing commitment to publishing and contributing to the general public discourse on investing. Over the years we have written many papers on quantitative investing (some on my own and some with my partners). Their early character was directly about our models, but in later years (with "Bubble Logic" the crowning example), they have focused more on issues of policy and overall market valuation. Issues like whether hedge funds really hedge as much as they claim, whether the most popular models for valuing U.S. stocks are broken, whether old style dividends are more important than people think, whether options should be expensed and whether international diversification gets a bum rap, have been some of our targets.
Speaking for myself, I have a tendency to tilt at windmills. In particular, when those supposedly "in the know" are pitching something (e.g., hedge funds, the overall stock market, or their own right to report mendacious earnings) based on illogical sound bites, falsely perceived expertise, or pseudo-intellectual flawed models, I admit I get a little crazy. I have been told that people with tempers generally have a problem in that they take too many things personally (e.g., the car that cut you off was probably not specifically cutting you off). I am guilty of this in my financial publications (e.g., an arrogant feeling of "I can't believe they think they can say this crapola about the Fed Model on my watch"). It's not particularly conducive to a Zen-like calmness for me, but it has fueled my passion for writing.
The result of many years of hard work has led to a body of work that I believe has been very helpful for investors, while it has integrated some humor with the substance, and in many cases, has taken highly contrary stands (e.g., telling your hedge fund brethren they don't hedge as much as they say and the lag in their marking-to-market overstates results, leading to lower net alpha than it first appears). If this sounds like I'm bragging a bit here, guilty, this is something I truly feel good about.
So, I'm skipping a lot now, but basically the last six years have been quite good for our process and our business. As mentioned earlier, AQR today manages about $35 billion and has a long list of clients that have shown confidence in us, which leaves us awed and humbled. We run well over 20 strategies (we started at Goldman in 1995 with four and at AQR in 1998 with seven), most of which apply value and momentum to a variety of investment decisions. And, we hope, there are still a lot more out there.
Excerpted with permission of the publisher John Wiley & Sons, Inc. from 'How I Became I Quant.' Copyright (c) 2007 by Barry Schachter and Richard R. Lindsey.