Excerpts from the Jan '08 Cover Story:
Riding the Storm
Wilmott Magazine talks to prominent people in the
quantitative finance field such as Peter Jaeckel (Global
Head of Credit, Hybrid, Inflation, and Commodity Derivative
Analytics at ABN Amro), Dr. Espen Gaarder Haug (options
trader and author), Rudi Bogni (chairman of MedInvest and
nonexecutive director of Old Mutual), Wim Schoutens
(research professor at the Catholic University of Leuven,
Belgium), Ed Thorp (Mmathematician and hedge fund manager),
Elie Ayache (ITO33) etc.
2007 had been mostly a smooth ride until the subprime
crisis threatened to rock the boat from all directions.
Eileen Lee talks to captains of the quantitative high seas
to try to work out what’s over the horizon ...
[snip]
Dr. Manoj Thulasidas at Standard Chartered Bank points out
that the multiple layers of transactions, mortgages to
hedge funds, and globalization meant that it is impossible
to pinpoint who has exposures to the subprime maelstrom. As
the crisis progresses, we keep hearing of yet another
previously unknown bank facing difficulties due to their
exposures to subprime. The question remains, how could so
many people have made the same mistake simultaneously?
[snip]
“A lot of the asset classes did extremely well in
2007; many did well until the subprime crisis completely
revealed itself. On the whole, the market did well last
year and there was no fundamental shift in the kind of
returns,” Thulasidas comments.
[snip]
Dr. Manoj Thulasidas at Standard Chartered Bank is slightly
more optimistic and prefers to focus on the opportunities
the higher volatility represents.
“Volatility is not a problem if you know how to take
advantage of it to make money. It has been a feature in the
commodities market for the last few months due to many
geopolitical issues, and the subprime crisis also drove up
volatility in the equity markets. It’s not
necessarily bad from a trading point of view. I’m
sure some people reaped benefits from it,” he
comments.
[snip]
Unknown this is no more, as the subprime crisis becomes one
more stress-test scenario for risk management. Thulasidas
explains, “I think the quantitative finance people
will learn something from this. However, at a fundamental
level, there would not be any money to be made if you know
exactly the risk or what will happen. You need models to
come out with future scenarios, and if they are not
complete, you’re not modeling everything that carries
potential risk. Risk and returns go hand in hand.”
[snip]
Thulasidas also believes the high volatility the industry
is experiencing could drive the demand for more customized
solutions.
“Customers are looking for more customized products,
more structuring, more mathematical work, and more
integration. All of this has to be done in house, rather
than relying on a generic trading platform because of time
sensitivity. That’s the kind of trend I’m
seeing in my particular field,” he says.
[snip]
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