Mark Carhart used to run the Goldman Sachs Asset Management with Ray Iwanowski. Goldman’s flagship Global Alpha hedge fund lost almost 40% in 2007 and had to be rescued by a $3 Billion injection. Last week Carhart gave a speech addressing Columbia University’s Quantitative Finance students. He said Goldman’s $3 Billion injection stabilised the markets and probably saved the Quants from complete destruction (he didn’t say “complete destruction” per se but we that’s how understood what he meant). Prior to the 2007 quant liquidity crunch, Global Alpha had $11.5 Billion under management. In the middle of 2008, their AUM went down to $2.5 Billion. In 2008, Global Alpha returned 2%, which didn’t make up for the enormous losses incurred in 2007, so Carhart “retired”.
Carhart revealed that Goldman was actually pleased with the Quant fiasco. They saw first hand in 2007 how liquidity in the markets can dry up in an instant, so they had ample time to prepare for the bigger crisis in 2008, which catapulted them to the top of the financial world.
Mark Carhart started his presentation by listing James Montier’s arguments about behavioural biases. He said he tries to remove emotional and behavioural biases from the decision making process. Then he explained that quantitative investing is getting crowded; everybody is chasing the same strategies based on the same academic research and that historical results don’t hold anymore. They weren’t able to see the magnitude of crowding prior to the Quant Liquidity Crunch. When the bets turn out as expected, everybody makes money and thinks their strategy is working. However, when the bets start losing money and everybody heads to the door, that’s when the real trouble begins.
In order to not repeat the same mistakes again, Carhart believes quants should be investing in research continually and to try to understand the evolution in market dynamics. Carhart used some of the slides from a 2007 presentation by Kent Daniel, co-chief investment officer at GSAM in 2009. Kent Daniel is currently teaching at Columbia’s Business School. http://www.ny.frb.org/research/conference/2007/liquidity/Daniel_Presentation.pdf
In 2010, Carhart launched his own quant shop (Kepos Capital), hoping to raise $1 Billion. He seems to be facing some scepticism from potential investors about quantitative investing, but he is optimistic.