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The Actuary The magazine of the Institute & Faculty of Actuaries
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Book review: The Quants

“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.” Reading this opening line of Scott Patterson’s book The Quants filled me with dread — it looked like I might be stuck with something akin to Dan Brown’s take on quantitative finance (although in fairness this probably would have had “billionaire financier Peter Muller” doing the stepping). However, despite the inauspicious start, this turned out to be a genuinely entertaining book.

The Quants explores the development of the quantitative finance industry, particularly in relation to hedge funds, from the 1960s to the present day. It does this through the stories of some of the individuals involved, starting with Ed Thorp, a key figure in the development of modern hedge funds.

As the industry expands over the following four decades, the cast of characters expands to include heads of the major hedge funds — Ken Griffen of Citadel, Cliff Asness of AQR, Boaz Weinstein of Saba, Jim Simons of Renaissance and, of course, billionaire financier Peter Muller of PDT. There are also supporting roles for Nassim Nicholas Taleb, Benoit Mandelbrot and Paul Wilmott, all of whom warn at some point of the troubles in store. The reason that this book is so enjoyable is that it describes not just the rise and fall of the hedge fund industry, but also the characters involved. This means exploring their backgrounds, their interests (which often include poker or blackjack) and other aspects of their personal lives. As a result, the characters seem more three-dimensional.

This is helped by the use of dialogue, making it seem as though the author was there. In some cases he was, or he has spoken to people who were — this is described in detail in an appendix. However, Patterson does admit that “some details were created to add verisimilitude to the account”.

There are a few details that might annoy some more financially sophisticated readers. In particular, some of the explanations of financial terms are perhaps overly simplistic. However, such simplification is done to make difficult concepts accessible to as many readers as possible. This task is accomplished well.

This book is, then, worth a look — although it might be worth waiting to see if a second edition emerges. Hedge fund strategies are again growing more complex as computing power develops. The increasing speed of high-frequency trading gives some people particular cause for concern, with one professional believing that “the next long-term capital management problem will happen in less than five minutes”. Indeed, Paul Wilmott notes that this book provides “... a gripping tale right until the last page... but fear[s” this is perhaps not the end of the story”. Until then, though, this book gives the story so far.

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Paul Sweeting is professor of Actuarial Science at the University of Kent.