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Alternative Market Briefing

Hedge fund manager says now is a good time to allocate capital to quants that have produced alpha on a consistent basis, Volatility shakes 130/30 funds as investors learn true risks of short-extension strategies

Tuesday, August 21, 2007

Opalesque Exclusive: Hedge fund manager says now is a good time to allocate capital to quants that have produced alpha on a consistent basis Charles B. Krusen, partner at Alpha Equity Management LLC / Copernicus International LLC and 130/30 fund manager, sent Opalesque the following observations on the recent market volatility and the quantitative strategies.

...Where do we go from here?  We believe that the current volatility will subside over the next few months.  We believe that the correlation between factors will revert to the mean.  Quantitative managers are hard at work to introduce new sets of factors and adjust models to avoid this type of systemic event in the future, but it is a certainty that disruptions like this will occur again.  When new instruments are introduced to the market (in this case, CDO and CDS), markets will often grow to the point of excess (subprime mortgages packaged as AAA), seeding the grounds for an often violent correction.  This does not mean that the products are necessarily flawed; some simply need specific parameters, others should not exist. 

The period after the correction is characterized by:

  • a better understanding of the process involved (October 1987: the use of portfolio insurance /delta hedging the put option)
  • an appreciation for international liquidity flows (Summer 1997: the Asian Contagion/current account deficits and short term money flows)
  • the proper position sizing and leverage ......................

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