Man vs. Machine on Wall Street: How Computers Beat the Market

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Asness thinks Nassim Taleb is right about the increasing frequency of Black Swan events. And quants still face severe threats from market volatility: according to a report from Morgan Stanley, quant funds betting against momentum stocks in Europe took a beating in early January that reminded many of the 2007 crisis, causing as much as a 10 percent overall loss. "In only a few days," the report said, a number of quants "experienced unprecedented losses in seemingly 'normal' market conditions." But Asness thinks the episode was overblown, and says AQR was unaffected by it. And he does not believe that quants, or other more traditional hedge funds, had any role in the catastrophic events of 2008. "The crash was about credit and real estate," he said. (That seems to be the conventional wisdom, at least as reflected by the report of the Financial Crisis Inquiry Commission.) "If you look at our history--even AQR's aggressive hedge funds--we've made money, and we have smoothed the path," he said.

They've also made themselves fabulously rich--beyond anything they could have imagined--and proved to themselves the wisdom of Kabiller's original vision. Asness thinks AQR has as much chance as anyone of predicting and protecting against the next Black Swan. Even so, he and his partners are occasionally given to intense periods of introspection, wondering whether the quantitative approach really still works. "I do have a recurring nightmare about being hacked to death by a pack of rabid black swans," he said. "What do you think that means? Seriously, anyone, quant or not, with a shred of intellectual honesty recognizes that there is some chance their historical success is just luck."

Still, he thinks AQR and the other quants have bounced back, from crisis after crisis in the markets, for one very important reason. "We had to first convince ourselves we were right," he said. And so they have.

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William D. Cohan, a columnist for BloombergView, is a contributing editor at Vanity Fair and the author, most recently, of Money and Power: How Goldman Sachs Came to Rule the World.

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