Regardless of which industry you are employed in, it’s always a good idea to know the background and history of that industry. The Quants by Scott Patterson is one such book which covers the origins of quantitative trading through the lives of some of most famous quant researchers. The book focuses on the story of Ed Thorp, Ken Griffin, Peter Muller and Jim Simons.
The book begins with an introduction of Ed Thorp, a brilliant mathematician who went from using math to win at blackjack to using complicated formulas and pricing techniques to beating the stock market. He is the author of the famous books, Beat the Dealer and Beat the Market. Most of the quants mentioned in the book have had some sort of connection to Ed Thorp whether it be that they knew him personally or were inspired by his books.
The book also discusses the rise of quants such as Ken Griffin (Citadel), Peter Muller (PDT), Boaz Weinstein (Deutsche Bank) and Jim Simons (Renaissance). It dives into how these quants got into quantitative trading and have been so successful. The readers are also provided with insights into these quants personal lives and the challenges they faced when they were building their successful hedge funds. Afterwards, the book covers how each of these quants almost lost everything during the 2007/2008 crisis. Most of these funds, especially AQR and Citadel, were on the verge of collapsing but managed to survive the tough times and rise once again.
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“Success has never been measured in home runs,” he said, “it’s the singles and doubles that got us here and will take us beyond. The best times are yet to come. Yes, there will be obstacles, but obstacles are opportunities for people who know how to get the job done. If you’re up for that, you’re in the right place.”
The Quants also provides a good overview of the stock market timeline and covers important events such as the 1987 crash, LTCM debacle, dot com bubble and the infamous 2007/2008 crisis. I felt Scott provided just the right amount of detail about each event in the book to keep the book fast paced and interesting. I have read many articles and books on the crisis and thought The Quants did a great job summarizing it. Here is a snippet to prove my point::
“A collapse in the subprime mortgage market triggered margin calls in hedge funds, forcing them to unwind positions in stocks. The dominoes started falling, hitting other quant hedge funds and forcing them to unwind positions in everything from currencies to futures contracts to options in markets around the world. As the carry trade unraveled, assets that had benefited from all the cheap liquidity it had spun off began to lose their mooring.”
One thing I didn’t like about the book was the strong emphasis on blaming quants for the 2007/2008 crisis. From my understanding, the crisis was due to subprime mortgages which were issued by banks. Another culprit was excessive use of leverage but both banks and hedge funds were at fault. It is not something specific to quant strategies. Scott also states that the fact that there were so many funds using same quant strategies played a major hand in so many of these funds collapsing together. But how many investors actually use unique strategies? I think Scott was a little too harsh on the quants.
Overall, I would highly recommend this book to anyone interested in the lives of quants and how the quant hedge fund industry came into existence. The book is in no way a detailed analysis of any one particular event or quant. It also doesn’t dive into specific quantitative methods used by the quants mentioned above. The Quants is a fast paced entertaining book. I am slow reader but I finished this book within two weeks (I mostly read during my commute)! You can find the book on Amazon.