Wednesday, November 28, 2007
It's been a hard year to reside in quant-land. The ignominy of being the smartest guy in the room and yet underperforming day-traders must gall those financial market participants with more degrees than the Sahara in the summer. Even Macro Man, whose "degree count" is closer to absolute zero than the desert, has seen his relatively simple quant strategies get absolutely butchered this month.
The problem, it appears, is that everyone who is using a model looks at the same things. Goldman Sachs, whose Global Alpha fund is reportedly suffering even more than Macro Man's beta plus portfolio this month, said in August that they'll need to include some more "unique factors" in their model construction. This strikes Macro Man as an eminently sensible suggestion. To help his quant-y friends, and to ensure that Aston Martins stay in the proper hands, he offers herewith some suggestions for unique factors to include in future-generation models. Astute readers should feel free to contribute their own suggestions below.
1) Neptune's moons. Has your 2007 performance left your investors out in the cold? Enlist the aid of the coldest thing in the solar system, Neptune's moon Triton! If the number of Neptune's moons visible from an earthbound telescope is even, go long stocks. If the number is odd, go short stocks. If your telescope is broken, go flat.
2) What book are you reading? If it is non-fiction, that suggests that you are interested in facts and analysis. Construct a bottom-up model that trades primarily from the long side. Are you reading fiction? You are creative and imaginative. Sell a basket of stocks short, contact a friendly journalist, and make up salacious rumours about each. Cover your shorts when you finish the book. If you don't or can't read, trade foreign exchange instead.
3) Flip a coin. An oldie, but a goody.
4) What colour shirt are you wearing today? If it is a primary colour (red, blue, yellow), go short equities. If not a primary colour (everything else), go long.
5) Football. Everyone's kids plays football (i.e. soccer) these days, even in America. If your kids score two or more goals combined this week, go long equities next week. If they score one goal, go flat. If they don't score, go short. If you don't have kids, become a broker- you'll be up all night entertaining clients , but at least you can sleep in at the weekends.
6) Use a dartboard. For those who manage Asian equities, where stocks are typically listed by numbers rather than mnemonics, construct a long/short basket by throwing darts at a dartboard. Not only will this give you an uncorrelated strategy, but the practice you get should enable you take take money off your friends at the pub on Friday night.
7) Use sunspot activity as a variable. Actually, maybe this isn't so unique after all.
9) Use Mr. Brain! In yesterday's comments section, Macro Man inadvertently noted that he used "mr. brain" to develop the simple VIX model that he had written about. Friend-of-the-blog Charles Butler helpfully found the link above. Macro Man isn't sure what Mr. Brain actually does, but is confident that it can only be of use in constructing financial market trading models.