The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It

The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It

by Scott Patterson
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The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It by Scott Patterson

With the immediacy of today’s NASDAQ close and the timeless power of a Greek tragedy, The Quants is at once a masterpiece of explanatory journalism, a gripping tale of ambition and hubris, and an ominous warning about Wall Street’s future. 

In March of 2006, four of the world’s richest men sipped champagne in an opulent New York hotel. They were preparing to compete in a poker tournament with million-dollar stakes, but those numbers meant nothing to them. They were accustomed to risking billions.  
On that night, these four men and their cohorts were the new kings of Wall Street.  Muller, Griffin, Asness, and Weinstein were among the best and brightest of a new breed, the quants. Over the prior twenty years, this species of math whiz—technocrats who make billions not with gut calls or fundamental analysis but with formulas and high-speed computers—had usurped the testosterone-fueled, kill-or-be-killed risk-takers who’d long been the alpha males the world’s largest casino. The quants helped create a digitized money-trading machine that could shift billions around the globe with the click of a mouse. Few realized, though, that in creating this unprecedented machine, men like Muller, Griffin, Asness and Weinstein had sowed the seeds for history’s greatest financial disaster.  
Drawing on unprecedented access to these four number-crunching titans, The Quants tells the inside story of what they thought and felt in the days and weeks when they helplessly watched much of their net worth vaporize—and wondered just how their mind-bending formulas and genius-level IQ’s had led them so wrong, so fast. 

Product Details

ISBN-13: 9780307453389
Publisher: The Crown Publishing Group
Publication date: 01/25/2011
Pages: 352
Sales rank: 151,961
Product dimensions: 5.10(w) x 7.90(h) x 0.90(d)

About the Author

SCOTT PATTERSON is author of the New York Times bestselling book The Quants and Dark Pools and a staff reporter for The Wall Street Journal. His work has also appeared in the New York Times, Rolling Stone and Mother Earth News. He has a masters of arts degree from James Madison University. He lives in Alexandria, Virginia.

Read an Excerpt

1: All in One

Peter Muller stepped into the posh Versailles Room of the century old St. Regis Hotel in midtown Manhattan and took in the glittering scene in a glance.

It wasn’t the trio of cut-glass chandeliers hung from a gilt-laden ceiling that caught his attention, nor the pair of antique floor-to-ceiling mirrors to his left, nor the guests’ svelte Armani suits and gemstudded dresses. Something else in the air made him smile: the smell of money. And the sweet perfume of something he loved even more: pure, unbridled testosterone-fueled competition. It was intoxicating, and it was all around him, from the rich fizz of a fresh bottle of champagne popping open to the knowing nods and winks of his friends as he moved into a room that was a virtual murderer’s row of topflight bankers and hedge fund managers, the richest in the world. His people.

It was March 8, 2006, and the Wall Street Poker Night Tournament was about to begin. More than a hundred well- heeled players milled about the room, elite traders and buttoned-down dealmakers by day, gambling enthusiasts by night. The small, private affair was a gathering of a select group of wealthy and brilliant individuals who had, through sheer brainpower and a healthy dose of daring, become the new tycoons of Wall Street. This high-finance haut monde—perhaps Muller most of all—was so secretive that few people outside the room had ever heard their names. And yet, behind the scenes, their decisions controlled the ebb and flow of billions of dollars coursing through the global financial system every day.

Mixed in with the crowd were professional poker players such as T. J. Cloutier, winner of sixty major tournaments, and Clonie Gowen, a blond Texan bombshell with the face of a fashion model and the body of a Playboy pinup. More important to the gathering crowd, Gowen was one of the most successful female poker players in the country.

Muller, tan, fit, and at forty-two looking a decade younger than his age, a wiry Pat Boone in his prime, radiated the relaxed cool of a man accustomed to victory. He waved across the room to Jim Simons, billionaire math genius and founder of the most successful hedge fund on the planet, Renaissance Technologies. Simons, a balding, whitebearded wizard of quantitative investing, winked back as he continued chatting with the circle of admirers hovering around him.

The previous year, Simons had pocketed $1.5 billion in hedge fund fees, at the time the biggest one-year paycheck ever earned by a hedge fund manager. His elite team of traders, hidden away in a small enclave on Long Island, marshaled the most mind-bending advances in science and mathematics, from quantum physics to artificial intelligence to voice recognition technology, to wring billions in profits from the market. Simons was the rare investor who could make Muller feel jaw-clenchingly jealous.

The two had known each other since the early 1990s, when Muller briefly considered joining Renaissance before starting his own quantitative hedge fund inside Morgan Stanley, the giant New York investment bank. Muller’s elite trading group, which he called Process Driven Trading, was so secretive that even most employees at Morgan weren’t aware of its existence. Yet over the previous decade the group, composed of only about fifty people, had racked up a track record that could go toe-to-toe with the best investment outfits on Wall Street, cranking out $6 billion in gains for Morgan.

Muller and Simons were giants among an unusual breed of investors known as “quants.” They used brain-twisting math and superpowered computers to pluck billions in fleeting dollars out of the market. By the early 2000s, such tech-savvy investors had come to dominate Wall Street, helped by theoretical breakthroughs in the application of mathematics to financial markets, advances that had earned their discoverers several shelves of Nobel Prizes. The quants applied those same breakthroughs to the highly practical, massively profitable practice of calculating predictable patterns in how the market moved and worked.

These computer-driven investors couldn’t care less about a company’s “fundamentals,” amorphous qualities such as the morale of its employees or the cut of its chief executive’s jib. That was for the dinosaurs of Wall Street, the Warren Buffetts and Peter Lynches of the world, investors who focused on factors such as what a company actually made and whether it made it well. Quants were agnostic on such matters, devoting themselves instead to predicting whether a company’s stock would move up or down based on a dizzying array of numerical variables such as how cheap it was relative to the rest of the market, how quickly the stock had risen or declined, or a combination of the two—and much more.

That night at the St. Regis was a golden hour for the quants, a predators’ ball for the pocket-protector set. They were celebrating their dominance of Wall Street, just as junk bond kings such as Michael Milken had ruled the financial world in the 1980s or swashbuckling, trade-from-the-hip hedge fund managers such as George Soros had conquered the Street in the 1990s.

Muller flicked a lock of sandy brown hair from his eyes and snatched a glass of wine from a passing tray, looking for his friends. A few nonquants, fundamental investors of the old guard, rubbed elbows with the quant crowd that night. David Einhorn, the boy-faced manager of Greenlight Capital (so named when his wife gave him the green light to launch a fund in the 1990s), could be seen chatting on a cell phone by a tall, narrow window overlooking the corner of 55th Street and Fifth Avenue. Just thirty-seven years old, Einhorn was quickly gaining a reputation as one of the sharpest fundamental investors in the business, putting up returns of 20 percent or more year after year. Einhorn was also an ace poker player who would place eighteenth in the World Series of Poker in Las Vegas the following year, winning $659,730.

The next billionaire Muller spotted was Ken Griffin, the blueeyed, notoriously ruthless manager of Chicago’s Citadel Investment Group, one of the largest and most successful hedge funds in the business. Grave dancer of the hedge funds, Citadel was known for sweeping in on distressed companies and gobbling up the remains of the bloodied carcasses. But the core engines of his fund were computer driven mathematical models that guided its every move. Griffin, who sported a no-nonsense buzz cut of jet-black hair, was the sort of man who triggered a dark sense of foreboding even in close associates: Wouldn’t want to mess with Ken in a dark alley. Does he ever smile? The guy wants to be king of everything he touches.

“Petey boy.”

Muller felt a jolt in his back. It was his old friend and poker pal Cliff Asness, manager of AQR Capital Management, among the first pure quant hedge funds. Asness, like Muller, Griffin, and Simons, was a pioneer among the quants, having started out at Goldman Sachs in the early 1990s.

“Decided to grace us tonight?” he said.

Asness knew Muller wouldn’t miss this quant poker coronation for the world. Muller was obsessed with poker, had been for years. He’d recently roped Asness into a private high-stakes poker game played with several other traders and hedge fund hotshots in ritzy Manhattan hotel rooms. The game had a $10,000 buy-in, couch cushion change to topflight traders such as Asness and Muller.

The quants ran the private poker game, but more traditional investment titans joined in. Carl Icahn, the billionaire financier who’d gotten his start on Wall Street with $4,ooo in poker winnings, was a regular. So was Marc Lasry, manager of Avenue Capital Group, the $12 billion hedge fund that would hire former first daughter Chelsea Clinton later that year. Lasry was known for being a cool investor whose icy demeanor belied his let-it-roll mentality. He was said to have once wagered $100,000 on a hand without even looking at his cards. And won.

The real point of Asness’s needle was that he never knew when the globetrotting Muller would be in town. One week he’d be trekking in Bhutan or white-water rafting in Bolivia, the next heli-skiing in the Grand Tetons or singing folk songs in a funky cabaret in Greenwich Village. Muller had even been spotted belting out Bob Dylan tunes in
New York’s subway system, his keyboard case sprinkled with coins from charitable commuters with no idea the seemingly down-on-his luck songster was worth hundreds of millions and flew around in a private jet.

Asness, a stocky, balding man with a meaty face and impish blue eyes, wore khaki pants and a white tee peeking out from his open collar. He winked, stroking the orange-gray stubble of his trimmed beard. Though he lacked Muller’s savoir faire, Asness was far wealthier, manager of his own hedge fund, and a rising power in the investment world. His firm, AQR, short for Applied Quantitative Research, was managing $25 billion and growing fast.

The year before, Asness had been the subject of a lengthy and glowing profile in the New York Times Magazine. He was a scourge of bad practices in the money management industry, such as ridiculously high fees at mutual funds. And he had the intellectual chops to back up his attacks. Known as one of the smartest investors in the world, Asness had worked hard for his success. He’d been a standout student at the University of Chicago’s prestigious economics department in the early 1990s, then a star at Goldman Sachs in the mid-1990s before branching out on his own in 1998 to launch AQR with $1 billion and change, a near record at the time. His ego had grown along with his wallet, and so, too, had his temper. While outsiders knew Asness for his razor-sharp mind tempered by a wry, self-effacing sense of humor, inside AQR he was known for flying into computer-smashing rampages and shooting off ego-crushing emails to his cowed employees at all hours of the day or night. His poker buddies loved Asness’s cutting wit and encyclopedic memory, but they’d also seen his darker side, his volatile temper and sudden rages at a losing hand.

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Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It 3.6 out of 5 based on 0 ratings. 142 reviews.
Pentheus More than 1 year ago
I read Patterson's book awhile ago and enjoyed the combination of its pace and illuminating details. I do not work on Wall Street so the context of this foreign land with its exquisite creatures resembled something almost fictional. Unfortunately this strange world GAMBLES with our retirements. After reading reviews here and elsewhere I have found an interesting reaction. Those with a vested interest (or simply want a cheap kindle version) have bashed the book with knee jerk that if nothing else shows it has struck a cord with those in the know. Squelch is an obvious industry insider trying to limit the truth in the book
dried_squid More than 1 year ago
Read a review of the "The Big Short" which ended with the question of whether "The Quants" was better, or complementary. I think it's complementary. Whether one calls it math, blind luck, strategy, or tactics, it's not too different. In this case, the traders relied on math to filter, then deliver "crucial" information to their attention, or the attention of the computer doing the trading unattended. "The Big Short" also mentions the ratings agencies, while "The Quants" does not. Probably because it follows a different theme. Seems like ratings agencies should be considered, because many trades were based upon ratings. From the "The Quants", I was exposed to more of the different types of trades, and some of the economic theory in which they live. "The Quants" focus on the role of the math whizzes and the effects of their trading on Wall Street. "The Big Short" follows the stories of a handful of traders as well, but with less history or economic theory or ripple effect. I liked the dialog in the "The Big Short" better. In the long run, I'm happy to have read both.
Lbio More than 1 year ago
I started in my quuest to understand how as an innocent investor, my net worth had crumbled with Charles Gasparini's book (the first one out) which really focused on the risk taking "genes" inherent in many of the Wall Street Players. They were often international level poker players and took on enormous risks and horrendous leverage. I then read Sec. Henry Paulson's book which was a little like being dropped into a Rugby scrum without knowing the rules - he did often define terms, but gave you no idea of the range of values. He is a defender of the "free market" (the market is all knowing and will correct itself unaided). In 2005, before he accepted the Secreatary of Treatury position, Goldman Sachs led the credit default swap popularization. He was a CEO, but like so many of them, not truly knowledgable about what his company was doing. His book shows how close we came to a depression, but is somewhat insensitive and self-serving in my opinion. Scott's book focuses on the mathematics which mathematicians, statisticians and physicists used to try to find the "Truth". What they failed to comprehend was that their idealized equations are not well connected to reality. Their equations failed to handle the "rare" event in the tail of bell shaped curves, which is exactly what happened. I have seen this for years in my scientific careers. This book does an excellent job of explaining what happened. It follows the key characters within the companies, explains how Lehman did itself in, not Paulson as some suggest, and describes his internal battle to save the finanical system which had frozen up, despited deeply held beliefs that this was not how government should act. I still don't understand, however, having AIG receive 100 cents on the dollar. I still think that should have taken some of their lumps for their stupidity rather than have the taxpayer salvage them to the tune of billions of dollars. In a true Free Market society, the losers fail, not be rescued by the taxpayer while the taxpayer's net worth crumbles.
Anonymous More than 1 year ago
While the cast of characters is hard to follow at times, overall this is an excellent analysis of the "quants" and their dubious contributions to world financial markets. The explanations and defininitions of the mechanisms used by the "quants" and their role in our financial crisis should be required reading to any investor who doesn't spend eight hours a day working in the real financial world.
squelch More than 1 year ago
Scott Patterson's _The Quants_ was thoroughly terrible. Patterson confuses financial engineering with quant trading. He misleads readers about the real cause of the credit crisis, which wasn't quants at all, but rather egocentric, overly greedy and under-regulated executives at various banks. It is pathetic to see how widely his dead-wrong views are being adopted among other journalists, as this means for sure that a convenient scapegoat has been found on which we can blame all our troubles. Patterson also arbitrarily uses the label "quant," calling whatever he feels like hating a quant strategy or technique, and calling whomever he wants to make out as a villain a quant. Boaz Weinstein isn't a quant, and neither is Ken Griffin. Both are credit traders, who use very deep fundamental analysis and gut instincts to make their trades. Cliff Asness and Pete Muller, the two actual quants of the four major personalities profiled, didn't do anything to cause or perpetuate any crises. The style of the writing reminded me of a cross between the National Enquirer and a Batman comic. Nerd king, math whiz, math wizard, value king, whiz-bang, crack team, "it was nuts," and whiz kid don't belong in serious books. His metaphors were terrible: "churning wheels of the Money Grid," for example. He claims that the carry trade was a "frictionless digital push-button cash machine based on math and computers-a veritable quant fantasyland of riches." This horrible abuse of the English language is also hyperbolic nonsense. Then there was this nonsense: "its hedge funds held about $140 billion in gross assets on $15 billion in capital, or the stuff it actually owned." And my favorite: "Lo's view of the market was more like a drum-pounding heavy metal concert of dueling forces that compete for power in a Darwinian death dance." What the hell?
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Couldn't put it down!
cez819 More than 1 year ago
Highly Recommended
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Paul Zetterower More than 1 year ago
Though some of the words are foreign to nonconomics persons like myself, this book still dors a pretty good job of explaining the eco meltdown.
Bill_EE More than 1 year ago
Very well written account of the subprime mortgage crisis that led us to the situation we are in today.
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