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Conversations with John D’Agostino

June 12, 2013 1 comment

First published in BBeyond Magazine, May 2013. (Download PDF)

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Book Review: Global Macro Theory and Practice

November 21, 2012 1 comment

Perhaps most of you have heard of the term Sovereign Wealth Fund (SWF). It was a term coined by Andrew Rozanov in 2005 to describe government-owned funds that invest in whole or in part outside their home country. Global Macro Theory & Practice is a book compiled and edited by Rozanov, an expert and advisor to sovereign wealth funds and intuitional investors on asset allocation, portfolio construction, risk management and alternative investments. Contributors include current practitioners from discretionary and systematic managers, prime brokerage specialist, investment consultants, funds of funds (FoFs) managers and institutional investors.

The book begins with a brief overview of the origins of Global Macro investing starting from John Maynard Keynes who managed the King’s College endowment fund at Cambridge to hedge fund legends in the late ’80s and ’90s, such as George Soros, Michael Steinhardt, Julian Robertson, Louis Bacon and the ‘Commodities Corporation Mafia’. The Commodities Corporation (acquired by Goldman Sachs Asset Management) has produced legendary traders such as Paul Tudor Jones, Bruce Kovner, Michael Marcus, Ed Seykota and Jack Schwager, author of the Wizards quadrilogy books on trading. The author touched briefly on some of these traders who have really come to epitomise the term Global Macro in the late ’80s, ’90s and early part of the noughties. Those interested in reading more on the trading styles of these global macro legends should refer to books by Jack Schwager. This chapter concludes with the future prospects of global macro.

The next two chapters are written by a discretional macro manager and a systematic macro manager. They cover asset allocation, CTAs and the differences between systematic and discretionary macro strategies.  The fourth chapter provides more colour to the different shades of Global Macro investing and how it fits in within a global tactical asset allocation (GTAA) profile. The fifth chapter evaluates the role of a global macro strategist from behavioural school economics’ standpoint.

Chapter six covers global macro in the emerging markets context with rich examples from relatively recent economic developments. Chapters seven and nine offer perspectives from a risk manager and prime brokerage specialist whilst chapter eight describes a theoretical framework for navigating geopolitical risks. The last four chapters bring together various elements of global macro investing, its inherent leverage and the case for global macro in institutional portfolios.

This book is the first of its kind to attempt to shed light and build a framework to describe current global macro practices – ‘a loose term that has come to mean different things for different investors’.  As global macro investing continuously evolves, this book offers a fresh look through the prism of leading current practitioners in the field that is grounded in both theory and practice.

Book Review: My Life as a Quant: Reflections on Physics and Finance

December 11, 2011 2 comments

Written by Emanuel Derman – physicist and ex-Goldman quant – the book combines my love for physics and finance and is one of the best books I’ve read in a long time. The first half of the book covers his life as a physicist at Columbia, Oxford, and Bell Labs. He talks about various luminaries and Nobel Prize winners he worked with or came across during his first reincarnation as a physicist. The book is excellent for those interested in physics and in search of the ultimate ‘truth’.

Emanuel Derman was head of Quantitative Strategies at Goldman and also spent time at the now infamous Salomon Brothers. He describes his work with Fisher Black (yup, THE Fisher Black of the Black-Scholes model) at Goldman and the famed John Meriwether’s bond arb group at Salomon.

The first half of the book is physics heavy whilst the second half focuses on one of the most interesting times in finance, where academics emigrated into Wall Street as quants in the 80s. As an armchair physicist, and currently working in finance, I thoroughly enjoyed this book.

I particularly like the part where he wrote:

“I began to believe it was possible to apply the methods of physics successfully to economics and finance, perhaps even to build a grand unified theory of securities.

After twenty years on Wall Street I’m a disbeliever. The similarity of physics and finance lies more in their syntax than their semantics. In physics you’re playing against God, and He doesn’t change His laws very often. In finance you’re playing against God’s creatures, agents who value assets based on their ephemeral opinions. The truth therefore is that there is no grand unified theory of everything in finance. There are only models of specific things.”

Perhaps he is my role model – finance is means to an end, not the end.

Derman is currently Professor at Columbia University and Director of its Financial Engineering Program

 

 

The Quants – How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It.

February 23, 2010 2 comments

The Quants

I pre-ordered this and received it the day of release. There were some negative comments on Amazon regarding this book that basically went along the lines of ‘the author is bashing quants (quantitative maths whizz) for the economic crisis’. It is clear the ‘reviewer’ did not actually read the book. For starters the author is a staff reporter for the WSJ. Not sure if that is a good thing or a bad thing. (For stories I’ll happily read the WSJ, but for objectivity I’ll stick to the FT.)

This book does NOT blame all quants for the crisis. Don’t judge a book by its cover; the title is probably more of a marketing ploy than anything. Patterson basically covers the alpha and the omega of a small breed of highly influential quants, the big swinging d!cks, the masters of the universe such as hedge fund bosses, head of prop traders and senior management of some major financial institutions on Wall Street.

The biographies and historical anecdotes of the major characters have to be taken with a pinch of salt, nevertheless the author did a good job with narration. Obviously anyone who is reading this book is smart enough to realise that the author is not reconstructing the ‘conversations’ verbatim.

The book begins with Ed Thorp (quant legend) who was the first guy that devised a mathematically ‘proven’ and field tested method to beat blackjack. Not satisfied with beating casinos at their own game Thorp decided to take his math skills to the biggest casino of all, Wall Street. He later ‘discovered’ a mathematical formula for buying and selling warrants. Thorp is perhaps best known for his two books, Beat the Dealer and Beat the Market, both of which are now classics.

Click here for podcast of an interview with Ed Thorp and Scott Patterson

The author then takes the reader through a journey in history to the present day titans of the financial markets such as Ken Griffin of Citidel and Cliff Asness of AQR, Peter Muller, Boaz Weinstein etc. These men each control billions and most of them wield PhDs in the quantitative field from the top academic institutions. They all share one thing in common: the search for THE truth/alpha. The truth/alpha roughly equates to knowing (or ‘predicting’) where the financial markets are heading and/or the world as a matter of fact.

According to them the truth/alpha can be measured a dollar at a time and for every dollar they accumulate, it represents one step closer to THE truth (if there was one). Possession of the truth or alpha promises ethereal riches.

However, the book does not go into detail on how financial modelling caused the crisis nor does it offer any concrete evidence as such. You just have to take the author’s word. Nevertheless the stories itself are worth it.

Try reading this with Fooled by Randomness and the Black Swan by Nassim Taleb. Which is what I did. Not only did these three books change my outlook on the financial markets and the economy in general, they had me re-examining my epistemological and philosophical paradigm of my knowledge (or the lack of it) on the said matter and in general.

Read an excerpt from the book (Chapter 2)

 

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