Black Box Trading : Why They All “Blow-Up”

While in Greenwich Ct. one afternoon I will never forget a conversation I had with a leading quantitative portfolio manager. He said to me that despite its obvious attributes “Black Box” trading was very tricky. The algorithms may work for a while [even a very long while] and then, inexplicably, they’ll just completely “BLOW-UP”. To him the most important component to quantitative trading was not the creation of a good model. To him, amazingly, that was a challenge but not especially difficult. The real challenge, for him, was to “sniff out” the degrading model prior to its inevitable “BLOW-UP”. And I quote his humble, resolute observation “because, you know, eventually they ALL blow-up“…as most did in August 2007.

→ Global Slant

Inside The Biggest-Ever Hedge-Fund Scandal

Hint : S.A.C.

The tactics echoed the approach the F.B.I. had used to dismantle the New York Mob. The plan was to arrest low-level soldiers, threaten them with lengthy jail terms, and then flip them, gathering information that could lead to arrests farther up the criminal hierarchy.
Over time, agents produced an organizational chart with names and faces, just as they had with La Cosa Nostra.
At the top of the pyramid was Steven Cohen.

It took me quite some time to read this gigantic piece, but as always, The New Yorker delivered a brilliant investigation. Here is another one from Vanity Fair.

→ The New Yorker

Do We Need To Fire PIMCO ?

Update : Now Felix Salmon thinks PIMCO should exit the mutual fund business altogether.

Virtually no large pool of assets in this industry is completely Pimco-free, whether we’re talking about Total Return or any of their other funds and SMAs. The issue cannot be ignored because the end-customers of these investors will have read plenty on the topic this weekend and will have questions and concerns of their own. No amount of reassurance from Pimco can change this fact right now.

This is the question that will lead off almost every investment committee meeting on earth tomorrow.

→ The Reformed Broker

Bill Gross: The Bond King’s Move to a New Throne

From Bloomberg’s Market Makers :

Celebrity sells. And it can sell mutual funds as well as it sells sneakers. Bill Gross helped build Pacific Investment Management Co. into a $1.97-trillion firm by becoming a star. He cultivated his fame with a busy media schedule and colorful commentary on everything from Paris Hilton to the U.S. economy’s “new normal.”

→ Bloomberg