Chidem Kurdas
Quantitative models sometimes come up with trades that go against the flow. Case in point: bullish bets on energy and financials in recent months, against a backdrop of approaching financial cliff and falling stocks in the United States, changing leadership in China and political turmoil against austerity measures in Europe.
Such bets do not necessarily imply a position on the medium- or longer-term direction of the market. Much computerized trading is short-term, with no inference for market movements beyond a very limited time frame.
An example is Quantitative Investment Management, the shop founded by Michael Geismar and Jaffrey Woodriff in 2000. Their main product is a short-term futures trading program, but they also have a $2.6 billion equity portfolio. Total assets are estimated around $5 billion.
The stocks they bought suggest an optimistic take on financial stability and economic growth despite current uncertainties. They put $44.3 million in Bank of America, $20.8 million in Citigroup and $24 million in Goldman Sachs. They went for alternative investment managers—Blackstone Group and Fortress Investment Group.
Plus, they got IShares and SPDR banking sector funds. And in addition made a leveraged long bet on financial services by buying $29 million in Direxion Daily Financial Bull 3x shares. It all adds up to a pretty positive take on financial companies that many investors are not happy with.
Energy firms and indexes are another big component of the QIM equity portfolio, which includes SPDR S&P metals and mining as well as oil and gas exploration.
Other quantitative traders held SPDR S&P metals and mining as well—among them veteran commodities trader Willem Kooyker’s Blenheim Capital.
In 2011 bullish bets led to losses. Blenheim lost in the commodities sell-off. QIM, which apparently has distinctive models and tends not to track other traders, ended 2011 with a gain of 5% in its futures program. This year the futures program made money through October, but the return was lackluster. The equity portfolio can’t be doing well in the recent market slump.
Do the models know something the rest of us don’t? Occasionally, yes. In 2008 model-based futures programs turned a profit when just about everything else tanked big time. But only few of them remain successful.
Incidentally, Mr. Geismar of QIM was in the news this spring with a big win at the Bellagio casino in Vegas. He used a simple strategy at blackjack, increasing bet size when he won and reducing bet side when he lost. You could take this as a model of sorts. It worked, but maybe Mr. Geismar was just lucky.
That’s always the big question about models.
Tags: Bank of America, Bellagio, blackjack, Blenheim Capital, Citigroup, Direxion Daily Financial Bull 3x, Goldman Sachs, Jaffrey Woodriff, Michael Geismar, Quantitative Investment Management, SPDR S&P metals & mining, SPDR S&P oil & gas, Willem Kooyker
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