Goldman Claims Momentum And Value Quant Strategies Now Overcrowded, Future Returns Negligible

Tyler Durden's picture

Even as momentum buyers keep driving the market to new 2009 highs today on a worse than expected ISM numbers (more Obamoney coming), none other than Goldman Sachs head of quant strategies Robert Litterman says that with everyone on the same side of the trade in momentum and value quant strats, the returns to these strategies are rapidly becoming negligible due to overcrowding. Of course, what happens when the crowds disperse is anyone's guess, although if Obama had anything to say about it, the exit would be cool, calm and collected. Obviously it will be anything but. And very limited upside also means very unlimited downside. Yet let he who wants to fight the Marriner Eccles lunatics cast the first short.

More from Reuters:

Computer-driven hedge funds must
hunt for new areas to exploit as some areas of making money have
become so overcrowded they may no longer be profitable
according to Goldman Sachs Asset Management.
Robert Litterman, managing director and head of quantitative
resources, said strategies such as those which focus on price
rises in cheaply-valued stocks, which latch onto market momentum
or which trade currencies, had become very crowded.

Instead he said opportunities could come in areas such as
event-driven strategies -- which focus on special events such as
mergers or restructuring -- and catastrophe reinsurance,
although he added they can just as quickly disappear.

He also pointed to credit, emerging markets, volatility
trading and commodities.

That's all we need: computers trading on event situations, where the first three letters of the headline will be sufficient to throw any thinly traded stock into a parabolic rise or drop. Whatever happened to good old fashioned humanitarian trading?

Yet isn't it ironic that none other than Goldman which lost billions in August 2007 when the quants went haywire most recently, should be warning about the dangers of overcrowded groupthink?

"You have to adapt your process," Litterman said at the
Quant Invest 2009 conference. "What we're going to have to do to
be successful is to be more dynamic and more opportunistic and
focus especially on more proprietary forecasting signals ... and
exploit shorter-term opportunistic and event-driven types of
Computer-driven or quantitative hedge funds attempt to make
money by quickly exploiting trends or anomalies in markets such
as equities, government bonds or currencies.

However, some funds such as Goldman's controlled a large
share of some markets in summer 2007 and many were caught in a
vicious circle of selling.
"I think the world has fundamentally changed for quants," he
said, adding that his funds now allocate a greater share of
assets to newer strategies since that crisis.

"We're putting together data that's not machine-readable,
finding databases that haven't been explored nearly as well as
others, identifying linkages across companies and industries and
finding patterns in the data that are not as well known."

Yeah right, things are so different than August 2007, when insane parabolic melt ups each and every day were so unique and so completely different to those from... today. The poetic justice of Goldman's trading P&L imploding after several "unique" haywire strategies end up losing the firm a cool couple of billion will be unsurpassed. Not only that, but the statistical garbage that is GS' VaR will finally be exposed for the sham mathematical artefact it is. Until then we can all wait and hope.


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bugs_'s picture

the world has fundamentally changed for quants

Tommy's picture

How many people must be insolvent before the market becomes rational?


I can long as I'm not one of the insolvent ones.  ;-(

hound dog vigilante's picture


GS is basically calling a top here... dismiss at your own peril.


A Man without Qualities's picture

They were told to push the market up, and they did just that.  Now they have decided there is no point pushing it any higher, so don't rely on them doing so..

Anonymous's picture

Don't buy Goldman disinformation.

trav777's picture

Jeez, when activity becomes negligibly profitable, make up the difference with LEVERAGE, baby...gfd, haven't these guys learnt yet?

Anonymous's picture

Lol. What's left to game? Toys for Tots?

Thomas's picture

We will be treated with some Obaloney tonight.

NYPoke's picture

Well, I think they KNOW where the next profitable trade will be: Short stocks.  "An object in motion will remain in motion, until acted upon by an outside force."  Wonder what that force will be.

Anonymous's picture

That should read "Robert Litterman", not "David Littermnan".

Anonymous's picture

Anyone for trading Somali pirate futures?

Anonymous's picture

clearly GS wants everyone to stop using their strategies ...

Anonymous's picture

UIt's nice to see goldman doing a community service by warning us. U guys are so wrong about these bloodsuckers.

Anonymous's picture

GS has been generous of both the good and the bad. And now on center stage, ... more bad. (o_0)

Anonymous's picture

Seems as though on agency of the federal gov't has found a squid....

MMS Study Positively Identifies Giant Squid Presence in Gulf of Mexico

Field Work for MMS Sperm Whale Prey Study Nets Giant Squid

NEW ORLEANS- During a recent research cruise, a rare giant squid was captured in the Gulf of Mexico.