Don't Quant On It

Goldman Sachs Group Inc.'s Global Alpha Hedge Fund took an unheard of hit in the month of August - 22.5 percent! The Fund made numerous poor decisions, with stocks, bonds, and currency investments; many rooted in shaky economic theory… at best. Alpha Fund has lost more than one-third of its market capitalization value this year alone. After word of this drop in value, investors informed the Fund that they wanted to pull out 1.6b in cash, totaling 20% of the Fund’s current liquid assets. This is what should have been expected, if any public company lost 1/3 of its value in 9 months, there would be a massive sell-off.
Alpha uses numerous mathematical models to evaluate potential trades, this strategy is known as Quantitative Investing. "We still hold our fundamental investment beliefs that sound economic investment principles couples with a disciplined quantitative approach can provide strong uncorrelated returns over time," Goldman Sachs Inc. said in an unsigned report that discussed on the funds drop.
While Quantitative Investing does take into consideration market trends, and prevents active managers from entering into a trendy market too late, it also attempts to find patterns and predict the Market’s next move; essentially stripping away the human bias. When you remove an active manager from the fast paced, hands on, boot in the trenches, 20 hour work day side of his job, its like removing his soul, emasculating him of his very essence. Just ask Martha Stewart.
In the world of Private Placement and Alternative Investments, accredited (especially high net worth) inventors are looking for long term wealth management and sustained growth. So when you have a math wizard who is able to apply a theoretical formula ONLY, you loose something. At what point did their formula fail to realize that they were hemorrhaging capital? Why were there no "stop limits" in place? These answers are simple: when a manager relies heavily on formulae he becomes much less nimble and tends to trade within a predefined set of parameters. For traders who are more hands on, it is the opposite; we are often examining sectors, and working 20 hour days. I feel sorry for the investors here, but not the managers. Financial markets are dynamic, never static and a hedge fund manager must be the same. Many have tried, most have failed: you simply can not stop the Market from moving, and when it moves you have to move with it. Quant Managers are not “active manager” they are more like conveyor belt puppets.
At Landes we have a philosophy: be like water; no matter the obstruction, remain fluid enough so that we may just flow around it, and not miss a beat. The current will trade up to the Ocean.

Happy Investing,

Fund Manager, Landes Capital Management