Kass: The Quant Bubble

A must read...... Pflichtlektüre......

"When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing."

Chuck Prince, former chairman and CEO of Citigroup (told to the Financial Times on July 10, 2007).

Kass: The Quant Bubble TSC ( H/T Anti Lemming )

A portion of the sharp rise in several asset classes over the past few months could be the dominance of quant funds that worship at the altar of price momentum (and the self-fulfilling prophecy of the fund flows that follow the price momentum induced by the quants!).

By some estimates, this price-momentum-based quant trading now has doubled in significance since early in the year, to more than two-thirds of the average day's trading.

> I doubt that this figure is correct, but it is verry telling that combined with High Frenquency Trading the "Quants" are the main market force dominating trading...... Doesn´t give me much comfort that the recent gains are "sustainable" ...... Especially after one of the biggest Bear Market Rallies ever on almost non existent Volume ( ! ) ..... Thank god the retail investor this time is smarter than the so called "smart money" ( 13th Straight Week Of Domestic Equity Fund Outflows As Market Rips 11% Over Same Period ) BRAVO ;-)

> Ich bezweifle das die von Kass gennante Zahl in der Tat so hoch ist.... Das aber die Quants zusammen mit dem sonstigen computergetützten Handel ( HFT) der wesentliche "Spieler" ( Investor traue ich mich in diesem Zusammenhang nicht in den Mund zu nehmen.... ) an den momentanen Märkten sind fördert nicht gerade mein Vertrauen in die Nachhaltigkeit in einen nicht "unwesentlicher" Teil der bisher verbuchten Kursgewinne . Nicht verbessert wird das Gesamtbild das der Anstieg praktisch unter minimalen ( ! ) Handelsvolumen stattgefunden hat.. Wenn man jetzt noch bedenkt das wir gerade einer der größten Bear Market Rallies aller Zeiten hinter uns haben sind immer neue Kursziele die man so jeden Tag zu hören bekommt zumindest "mutig"...Glücklicherweise scheint es diesemal so das der "Kleinanleger" sich nicht erneut für das über Jahre erprobte "PUMP & DUMB" begeistern läßt ( 13th Straight Week Of Domestic Equity Fund Outflows As Market Rips 11% Over Same Period ). BRAVO ;-)

Trades initiated by these funds are insensitive to an underemployment rate approaching 18%, signs of an unsteady recovery in housing, the prospects for higher marginal tax rates and how we are going to finance our budget deficit, which hurdles ever higher.

If you don't believe me about the growing quant fund influence, speak to any prominent institutional trader or salesman: They will tell you that their business with plain vanilla institutions is weak and that the quant funds are the ever growing whales of trading.

The pattern is all-too familiar as a new marginal buyer of an asset class dominates the market until they don't.

Here is an anecdote that underscores the changing landscape and is reminiscent of other sectors hiring at tops. (To refresh your memory, this occurred several years ago in private equity and was followed by a sharp cyclical decline in private-equity deals.) At any rate, a subscriber wrote me a telling note recently about his son's friend who attends Wharton and is "a genius in math and game theory." He was just hired by a high-frequency trading firm after being interviewed by 15 similarly talented employees at the firm. He is 20 years old and has been offered approximately $100,000 a year, with a bonus that can add up to an additional $100,000 a quarter! That's far better than even the estimable Goldman Sachs pays!

Keep dancing if you will, but I continue to sit out the melt-up in stocks and the bubble in other asset classes. When investors/traders are arguably overinfluenced by prices (not fundamentals) that dominate the markets, and are all on a similar side, it has the potential to lead to a treacherous and slippery slope, as it did in 2007-08.

Remember, it is some of the same momentum-based quant funds that sold in March 2009 that have been buying over the past few months

AMEN.....