market folly

We've finally had a chance to read Wall Street Journal reporter Scott Patterson's book. So today, we're reviewing The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It. Right off the bat, we can tell you that the majority of readers will find this book interesting. Why? Because it takes you inside the secretive world of hedge fund manager Jim Simons of Renaissance Technologies (RenTec). Not to mention, it also profiles Ken Griffin of Citadel Investment Group, Cliff Asness of AQR Capital, Peter Muller of Morgan Stanley's PDT (process driven trading) hedge fund, and Boaz Weinstein of Saba Capital (previously at Deutsche Bank).

If you're like us and crave information regarding these mysterious managers, then this is for you. Patterson's book reads like a narrative and paints a clear picture of each of the gentlemen that have been instrumental in the development of the quantitative side of Wall Street. The Quants starts by focusing on Ed Thorp, a mathematics professor known for making money via beating blackjack with his book, Beat the Dealer. It then shifts to how Thorp went on to help pioneer the quant field on Wall Street with his convertible arbitrage strategy. The book describes the history and evolution of quantitative trading, framing things nicely before shifting focus to the financial crisis.

As the tale progresses, we see how some quants nearly collapsed in 2007. Patterson highlights just how deadly leverage gone wrong can be. It seems quants began to stray from the most important tenets of risk management and, yet again, we're faced with a Wall Street story filled with greed, leverage, and hubris. And as the quant 'godfather' Thorp preached: you shouldn't bet more than you can afford to lose.

So, what's enjoyable about the book? The in-depth profiles of Simons, Griffin, Asness & more, of course. But what's also fascinating is the overall storyline regarding the near implosion of many of these managers during late 2007. Industry insiders will already be familiar with this 'crisis before the crisis,' but the book definitely showcases what a truly scary time this was. It details the stories that began to leak out back during their meltdown, including how Cliff Asness was punching computer screens and how Muller's fund unit lost $300 million in a single day. Also, the tie-ins and focus on poker in The Quants was intriguing as all these fund managers love to play and fittingly, are quite good at the game.

What the book lacks: Technical details. Given the subject matter, we expected more of an in-depth look at the methods within this ever-growing segment of Wall Street. However, we concede that when writing a book which will be read by a wider audience, concessions have to be made. Casual investors will find the book satiating while hardcore industry veterans might crave a bit more detail.

In the end, this book's story epitomizes the constant greed found on Wall Street. Equally important, it helps shine a spotlight on a mysterious and complex corner of the markets that many otherwise wouldn't normally gain access to. While Patterson often uses cliches in his writing, the in-depth focus on these quant hedge fund managers during perilous times more than compensates. The Quants is your ticket inside their seemingly secretive world.

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For other insightful books on markets and investing, be sure to check out our other book reviews, as well as our recommended reading lists.