Though they may be designed to meet a specific client

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though they may be designed to meet a specific client need, their true worth is impossible for the client to assess. In the meantime, these structured products can generate millions of dollars in revenues for Wall Street firms. It is not the most glamorous work, but make no mistake: quants can be worth their weight in gold; the best ones get paid millions of dollars. Sadly, that’s why actual rocket scientists and engineers leave their professions for the allure of making ten times as much money in finance. Some quants have gone out on their own and started quantitative hedge funds, relying on their smarts and the models they’ve built to generate outsize returns for themselves and their investors. (When you hear someone on Wall Street talk about a “black box,” there isn’t an actual box. It is the computer model that one of these quants has built.) It was my job to cover the biggest quant funds on the Street—in particular, Goldman’s flagship fund, Global Alpha, run by Mark Carhart and Ray Iwanowski; AQR Capital, run by Cliff Asness; and Bridgewater Associates, run by Ray Dalio. I mostly dealt with the trading desk at each of these hedge funds. In 2007 these three managers alone had close to $100 billion in assets, and saying they ran into a little trouble in the summer of 2007 would be a huge understatement. The name Global Alpha was very Goldman Sachs. Alpha is not just a term that primatologists use to describe the big swinging monkey who rules the pack. In finance terminology, alpha indicates the excess return of an investment relative to its benchmark. Global Alpha had been created in the 1990s by Cliff Asness, who had an aura of being so smart that some people said he could bend spoons just by looking at them. He’d studied under the libertarian economist Eugene Fama and had a doctorate in finance from the University of Chicago. Asness had developed a black-box computer model that combined, in powerful ways, the ideas of value investing (buying stocks, bonds, currencies, and commodities at less than their intrinsic value and holding on till the price rises) and momentum investing (buying or selling securities according to
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their movement over a certain period). The model, which was designed to seize on anomalies (mispriced securities), produced such impressive results that in 1997, in the midst of the inflating dot- com bubble, Asness left Goldman to start his own hedge fund, AQR Capital. After he left, the running of Global Alpha fell to his two deputies, Carhart and Iwanowski. They more or less kept Asness’s quant model and tried to improve on it over time. This computer program could decide, more quickly than any human, when to buy and when to sell. For most of the next decade, even during the 2002–2005 recession, Carhart and Iwanowski’s black box kept minting money for the firm, month after month after month. The media speculated that Mark and Ray were earning $20 million a year. Global Alpha became a source of huge pride and revenue for the firm—to the point where our detractors were enviously likening all of Goldman Sachs to a giant hedge fund.
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