The “quant bloodbath”

While most of the rest of world has been looking to Wall Street for the past few days, wondering what will happen to their investments, graduate students in math and the sciences are more likely to have been wondering about jobs managing those investments.

Today, I was at the wedding of fellow grad student (congratulations Anton and Lacra!) and ended up striking up a conversation with a graduate student who is interested in a Wall Street job, and was worried about the prospects in the aftermath of the current panic . I’ll admit, I poo-pooed the idea at the time (after all, Wall Street has had a lot of panics before, and it doesn’t seem to have hurt the financial industry much yet), but after getting home and doing some blog reading, I’m starting to feel I should have given the idea a bit more credence.

Via my fellow Berkeleyite Brad DeLong (it only occurs to me now that my opportunities to show up at his office hours or run into him in the elevator in Evans have all be squandered. Curses!), it turns out that the current crunch hit some quant-based funds pretty hard. One Goldman Sachs fund appears to have lost over a quarter of its value, and Jim Simons has had to send out a letter explaining his losses to his investors (more details at abnormal returns). Apparently quantitative models didn’t do a good job taking behavior like the last few days into account. The money quote (from an analyst at Lehman Brothers): “Events that models only predicted would happen once in 10,000 years happened every day for three days.”

Oops. Wait a second…doesn’t this all sound a little familiar?

Since, as I mentioned before, my primary interest in hedge funds is how many Ph.D.’s they hire (while I don’t plan on taking a job at a hedge fund any time soon, I think it’s reasonable to keep track of how possible it is. Not to mention that the state of the job market for mathematicians as a whole is rather important to me), I have to wonder how this will shake out. Will people get scared away from quant funds if they continue to hemorrhage money, or will funds need more mathematicians to incorporate ever more complicated market behavior into their models? Inquiring minds want to know.