Kind of Magical
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It was the hedge funds that this new quantspeak really appealed to. They didn’t believe in their own ability to predict future stock prices. That’s what made them quants. So they sure as heck weren’t going to assign any value to the predictions brokers were sending them.
But the shift in investing philosophy wasn’t just about which stocks to buy or how to best construct a portfolio. The expectation of overall market behavior was also changing. For example, Grandpa bought stocks but he never sold them. This was common in his day but under the new regime it was clearly foolish. By 2007 we knew that stocks could go down. The idea that stocks always go up was naive.
So there was a proliferation of interest in strategies for “hedging” against various asset-price declines. It was believed that the right hedging strategy could protect the value of your portfolio, or even increase it during times of stress. Hedging was kind of magical. It could keep the portfolio demons at bay. I searched in vain for a clear and convincing explanation of how hedging worked.
I was getting outside of my lane again. You see, hedging was one of the greatest secrets of the quant. I could ask a quant how it worked, but like any good magician, he would not reveal the trick. Even if he did, I wouldn’t be able to comprehend it. I was only a stupid programmer, and in the equity division no less.
So I was faced with a problem. I couldn’t invest my bonus money without some sort of hedging strategy, because stocks can go down. And I couldn’t come up with a dependable hedging strategy because I didn’t have time to go for a Phd in math or physics. I couldn’t just buy stocks like Grandpa had because that would lead to ruin at the next crash, which was inevitable. Finally, I couldn’t hold cash because the inflationary spending of the government would wash away my bonus money away like a sand castle at the beach.
I know. I was really overthinking this whole problem of investing in stocks. I thought my problem was not understanding the strategies and the market and the data well enough. I thought my fear and doubt and confusion were because I was a novice. I thought I would gain more confidence as I learned.
So I did what every budding investment genius does and I fired up Excel on my laptop. There was just one problem. I had no idea how to use it. Until then my relationship with Excel mostly involved trying to eliminate it. Taking ideas out of spreadsheets and “institutionalizing” them was my job.
I had never created a spreadsheet myself.
The thing I noticed was that traders were really good at making spreadsheets do impressive things in short amounts of time. The same results would take me a lot of work to reproduce in an “enterprise” application. I didn’t understand how they could perform sophisticated analytics in such a primitive tool, while I couldn’t even figure out how to invest my bonus check using all of my allegedly elite computing skills.
