Paolo Pellegrini Is Coming Back As A Quant, Laments Loss Of Traditional Investment Thought In A Fed-Dominated World
It appears Paolo Pellegrini, the brains behind Paulson & Co. most profitable trade, is coming back... as a quant. As we reported in August, the billionaire manager's former fund - PSQR - had decided to return all capital to investors citing "challenging market conditions." It only took Paolo 3 months to realize that money is no longer to be made in a macro world dominated by central bank infighting, in which a schizophrenic market goes up or down by several percentage points on a daily basis depending on what word feels out of place in any given central banker's speech, and instead will focus on "quantitative disciplines" along the lines of DE Shaw and RenTec. And why not: the only ones left making money in this market are momentum chasing strategies which have millisecond frontrunning arbitrage over the rest of what is left of the heard. As to the visionary's current market views, his mantra is "don't fight the Fed" even as he sees bond trading at ridiculously high levels, although with a caveat: "of course you don’t want to fight the Fed, until the Fed loses control which is what happened obviously in the sub-prime and financial crisis. That is very difficult, though, to predict." As we predicted earlier in the year not only are macro funds soon going to be extinct but the same fate lies in store for the traditional long/short 130/30 group. Very soon every fund will need to have their own quant/HFT group (SAC has already quietly amassed almost 20 HFT pods) just to be able to attract outside investors. After all why else is the woefully underpaid SEC admitting it has no idea how to fix the market now entirely dominated by HFT, and will merely extend its completely worthless "circuit breaker" model for another three months, then another three months, and so on.
Some other observations from Paolo Pellegrini's interview during today's Hedge Fund congress:
“I think that this year essentially I was concerned about the unresolved issue of what I call a demand deficit. The United States is still over ¼ of world GDP and world demand. Europe is another 25% plus. So you can’t have a situation where all of a sudden you lose these streams of demand that was generated by increasing leverage over time and not have some consequences. It was interesting today there was some piece about Iceland and the fact that Iceland, after all—after being a disaster story early on because it took some difficult steps and did not try to bail out a failed private banking sector—is now in effect doing better than Ireland, which instead used something that is much more similar to the American approach and now they are going to have to pay for that. [a topic we discussed here."
"My concern was that the demand deficit would come into play. It seems that we are going through a very determined effort by the Federal Reserve to target asset prices. It seems to be some of the conclusion from various conferences and others—Goldman Sachs came up with a view that the level of the stock market is the best level of the financial condition. So if you look at that and then you see, what are we going to do—we can buy bonds, we can’t buy stocks, so we buy enough bonds so that the stock market reaches some sort of an acceptable level. To me all of that is the reality and it’s difficult to fight the reality. Everybody says, ‘Don’t fight the Fed.’ Of course you don’t want to fight the Fed, until the Fed loses control which is what happened obviously in the sub-prime and financial crisis. That is very difficult, though, to predict. In terms of the way I manage my portfolio at this point, and it’s really part of why I thought it was important to take a break in terms of managing outside money, is that I’ve gone from a situation where I was suggesting that I would be able to profit from high levels of volatility and large market moves, to one where I say this is a very difficult situation—let’s try to figure out a strategy to figure out the real purchasing power of my capital.”
Pellegrini also commented on his current strategy, “I’m stepping back, I’m trying to put together a more stable team, focusing on more quantitative types of disciplines, I admire a number of investors: DE Shaw and RenTec are obviously interesting examples. I think that there is so much arbitrary input in the investment process at this point, given all of the regulatory and central bank actions, that it is difficult to have a linear process of thinking about the world and how to make money. It’s sort of more complicated than that—there is a lot of unpredictable externality from decisions that are a combination of personal ideology of different players and political realities of different points of time.”