Strings in the New Yorker

I think the article, which discusses the new books by Woit and Smolin, is very fair, and it ends with a surprisingly mature recapitulation of the decoupling theorem and the irrelevance of quantum gravity to applied science. Every man, woman and child should read it and then ask their local particle theorist for more clarification.

I’ve read chunks of Smolin’s book and it’s quite good, although not without flaws. I have to go back and reread it — I picked it up in a bookstore and couldn’t put it down for at least an hour. I found his discussion of finiteness of string perturbation theory confusing — he represents Mandelstam as saying one thing in the main text, but the email quoted in the footnotes doesn’t seem to back it up. If the analytic continuation is the only problem then it’s not on worse footing than many other results in theoretical physics. But, then, what have D’Hoker and Phong (and my grad school colleague Nathan Berkovits) been up to all this time? If I believed in string theory I’d have to spend some time sorting this all out.

…Today, more than a decade after the second revolution, the theory formerly known as strings remains a seductive conjecture rather than an actual set of equations, and the non-uniqueness problem has grown to ridiculous proportions. At the latest count, the number of string theories is estimated to be something like one followed by five hundred zeros. “Why not just take this situation as a reductio ad absurdum?” Smolin asks. But some string theorists are unabashed: each member of this vast ensemble of alternative theories, they observe, describes a different possible universe, one with its own “local weather” and history. What if all these possible universes actually exist? Perhaps every one of them bubbled into being just as our universe did. (Physicists who believe in such a “multiverse” sometimes picture it as a cosmic champagne glass frothing with universe-bubbles.) Most of these universes will not be biofriendly, but a few will have precisely the right conditions for the emergence of intelligent life-forms like us. The fact that our universe appears to be fine-tuned to engender life is not a matter of luck. Rather, it is a consequence of the “anthropic principle”: if our universe weren’t the way it is, we wouldn’t be here to observe it. Partisans of the anthropic principle say that it can be used to weed out all the versions of string theory that are incompatible with our existence, and so rescue string theory from the problem of non-uniqueness.

…Neither Smolin nor Woit calls for the forcible suppression of string theory. They simply ask for a little more diversity. “We are talking about perhaps two dozen theorists,” Smolin says. This is an exceedingly modest request, for theoretical physics is the cheapest of endeavors. Its practitioners require no expensive equipment. All they need is legal pads and pencils and blackboards and chalk to ply their trade, plus room and board and health insurance and a place to park their bikes. Intellectually daunting as the crisis in physics may be, its practical solution would seem to demand little more than the annual interest on the rounding error of a Google founder’s fortune.

“How strange it would be if the final theory were to be discovered in our own lifetimes!” Steven Weinberg wrote some years ago, adding that such a discovery would mark the sharpest discontinuity in intellectual history since the beginning of modern science, in the seventeenth century. Of course, it is possible that a final theory will never be found, that neither string theory nor any of the alternatives mentioned by Smolin and Woit will come to anything. Perhaps the most fundamental truth about nature is simply beyond the human intellect, the way that quantum mechanics is beyond the intellect of a dog. Or perhaps, as Karl Popper believed, there will prove to be no end to the succession of deeper and deeper theories. And, even if a final theory is found, it will leave the questions about nature that most concern us—how the brain gives rise to consciousness, how we are constituted by our genes—untouched. Theoretical physics will be finished, but the rest of science will hardly notice.

Managing expectations

Kindler, gentler hedge fund manager Barry Ritholz writes about the Amaranth blowup. He puts some of the blame on investors, for not understanding that Amaranth had to be taking huge risks to generate recent outsized returns. The way the game is structured, managers are incentivized to describe their strategy and expected returns as follows:

“We expect gains of 35-45%, with minimal risk or leverage. Our black box algorithms have been backtested, and generate better numbers than that, but we would rather under-promise and outperform.”

Before you roll your eyes, hear me out on this. I have some very specific experience with this, as I have spent the past 18 months or so traveling around the United States, speaking with my limited partners (i.e., investors) and with potential investors for our hedge fund.

My experience with this is why I have been watching the unfolding debacle at Amaranth Advisors’ with some bemused detachment.

Now, without revealing any specifics, I will tell you we have had conversations with some very intelligent people who were a pleasure to meet with; Brilliant, fascinating, successful folk with interesting lives and of great accomplishment. However, once we sat down with their financial advisors – lawyers – accountants, things became, well, repetitious. In every meeting, there were some variations on the same conversations; Its like there is some hedge fund due diligence form that makes everybody ask nearly identical questions:

What’s your track record? (Good)
How much skin do you have in the game? (alot)
How is Alpha generated (our models keep us on the right side of the major trend, and avoid big counter-trend moves)
What do you think will happen to the economy and the market?
(I don’t know, but here’s an underappreciated possibility . . .)
What is your Gamma ? Sharpe Ratio? (I neither know nor care; This isn’t a B-school exam)

Then comes the exact same question, which I (foolishly) answer honestly:

“What sort of performance are you looking for?”

I usually start with: “It depends upon what the market offers us; If we remain range-bound, it will be difficult to put up great numbers without a lot of leverage or a lot of risk (or both), and we don’t do that. We do particularly well, however, in major dislocations or strong rallies.”

My initial answer is rarely accepted, and I am forced to go to a 2nd and 3rd option:

“Give us more details on what you want to do. What performance would you be happy with?”

Answer two: “What we want is irrelevant; Its what we can reasonably do while still managing risk, and not overleveraging. Our goal is to outperform the S&P500 with less risk, and in the event the SPX is negative, still have positive expectancy (i.e., be up when the indices are down).”

“So you are a relative (rather than absolute) performance fund?”

Answer 2b: “Well, most funds actually are, despite their claims of absolute performance regardless of market conditions. Consider the mediocre performance numbers from most funds recently when the market’s been range-bound. Its been pretty weak, and that’s no coincidence. There are only a handful of true absolute performance funds with great long term track records (and if you are talking to me, its because you cannot get into them).”

Now comes THE QUESTION. This is the one that gets people into trouble:

“We are looking for a number. What should we expect from you in the first 2 years?”

What they want to hear is “I am going to do 30-40% annually, fully hedged.”

I don’t say that, because it isn’t true. (God bless Jim Simons, who actually can honestly say that). That’s what too many investors are looking for; its nothing more than the greed factor at work. They don’t say it explicitly, but its true: We want you to outperform the long term S&P500 benchmark by 300-400% annually (and we don’t care about mean reversion). We really don’t care how you do it. We want outsized profits. WE WANT THE LATE 1990S AGAIN.

Money raisers and some GPs have long ago figured this out. You have a few choices: you can answer the investors’ questions honestly — or to quote Ray Davies, you can give the people what they want (or think they want):

“We expect gains of 35-45%, with minimal risk or leverage. Our black box algorithms have been backtested, and generate better numbers than that, but we would rather under-promise and outperform.”

Of course, that statement will be nonsense for 99.8% of the people who utter it. The vast majority of funds will not out-perform the indices dramatically year after year. We were fortunate — we ended up with investors who understood this; Then again, we are a small fund, and not a $9B giant.

There are some funds that aim to fill this niche. They use lots and lots of leverage, play the highest beta moves, load up on derivatives, put up good numbers for a stretch. Eventually, they do one of two things: They take on some risk management — lower their volatility plays, reduce leverage, aim for more sustainable gains.

Or they blow up.

Not all of them, but enough. Something like 25% of all hedge funds every couple of years dissolve, go away, reform, pop up elsewhere. That’s not a coincidence, either.

Cody’s and The Price of Admission

I was in Berkeley over the weekend and saddened to learn that the Telegraph Ave location of Cody’s Books has closed after 41 years. I spent countless hours there as a grad student, broadening my intellectual horizons thanks to the impeccable and wide-ranging tastes of their staff.

At their 4th street location (still in business, and right next to a Peet’s Coffee), I had a chance to look at Daniel Golden’s The Price of Admission, which I mentioned in an earlier post. Although most of the attention has gone to his expose of celebrity and super-rich admits, he devotes an entire chapter to the discrimination against Asians (the chapter is entitled something like Asians: the new Jews, recalling the ivy league Jewish quotas in place as recently as 50 years ago). He recounts numerous cases of accomplished immigrant kids of humble origins (particularly a lot of Chinese or Korean strivers), inexplicably denied admission to top schools. He even collects crypto-racist quotes from anonymous admissions officers, to the effect of “these Asian kids are all alike — strong scores and grades, science and music, but I can’t really tell them apart.” When will Asian-Americans wake up and defend their rights? There is enough evidence for a strong class action lawsuit.

Golden, a Harvard man, also devotes an entire chapter to extolling Caltech as a paragon of merit-based admisisons 🙂 The only problem is, he refers to it at the beginning of the chapter as just a small engineering school

Cody’s and The Price of Admission

I was in Berkeley over the weekend and saddened to learn that the Telegraph Ave location of Cody’s Books has closed after 41 years. I spent countless hours there as a grad student, broadening my intellectual horizons thanks to the impeccable and wide-ranging tastes of their staff.

At their 4th street location (still in business, and right next to a Peet’s Coffee), I had a chance to look at Daniel Golden’s The Price of Admission, which I mentioned in an earlier post. Although most of the attention has gone to his expose of celebrity and super-rich admits, he devotes an entire chapter to the discrimination against Asians (the chapter is entitled something like Asians: the new Jews, recalling the ivy league Jewish quotas in place as recently as 50 years ago). He recounts numerous cases of accomplished immigrant kids of humble origins (particularly a lot of Chinese or Korean strivers), inexplicably denied admission to top schools. He even collects crypto-racist quotes from anonymous admissions officers, to the effect of “these Asian kids are all alike — strong scores and grades, science and music, but I can’t really tell them apart.” When will Asian-Americans wake up and defend their rights? There is enough evidence for a strong class action lawsuit.

Golden, a Harvard man, also devotes an entire chapter to extolling Caltech as a paragon of merit-based admisisons 🙂 The only problem is, he refers to it at the beginning of the chapter as just a small engineering school

Cody’s and The Price of Admission

I was in Berkeley over the weekend and saddened to learn that the Telegraph Ave location of Cody’s Books has closed after 41 years. I spent countless hours there as a grad student, broadening my intellectual horizons thanks to the impeccable and wide-ranging tastes of their staff.

At their 4th street location (still in business, and right next to a Peet’s Coffee), I had a chance to look at Daniel Golden’s The Price of Admission, which I mentioned in an earlier post. Although most of the attention has gone to his expose of celebrity and super-rich admits, he devotes an entire chapter to the discrimination against Asians (the chapter is entitled something like Asians: the new Jews, recalling the ivy league Jewish quotas in place as recently as 50 years ago). He recounts numerous cases of accomplished immigrant kids of humble origins (particularly a lot of Chinese or Korean strivers), inexplicably denied admission to top schools. He even collects crypto-racist quotes from anonymous admissions officers, to the effect of “these Asian kids are all alike — strong scores and grades, science and music, but I can’t really tell them apart.” When will Asian-Americans wake up and defend their rights? There is enough evidence for a strong class action lawsuit.

Golden, a Harvard man, also devotes an entire chapter to extolling Caltech as a paragon of merit-based admisisons 🙂 The only problem is, he refers to it at the beginning of the chapter as just a small engineering school

US income inequality: caused by financiers and tech entrepreneurs

Income inequality in the United States is at historic highs, after significant increases in the last decade. For example, in 2003-2004 the average income of the top 1 percent of the population increased by 17 percent while that of the remaining 99 percent increased by only 3 percent in real terms.

It is important to understand this phenomena in more detail: is there a widening nationwide gap between the rich and all others? Data on incomes by county covering the mid to late 1990’s, from the government Bureau of Economic Analysis, shows an interesting geographical pattern. Most of the gains enjoyed by the top 1% came from a small number of counties. In particular, income increases at the top end in tech hotbeds Seattle and Silicon Valley, and finance capital New York City, account for almost all of the aggregate nationwide increase. If four counties in those regions are removed, there is almost no increase in inequality during that period.

So, the good news is there isn’t a national phenomena at work here (and, perhaps, Bush is not to blame — at least, if tax cuts were the cause I would expect the effect to be more uniform geographically; future data will tell). Let me be the first to welcome our financier and tech entrepreneur overlords! 🙂

The gilded age in China

The Times reports on nouveau riche parents in China and the special classes and activities lavished on their kids, such as private golf lessons and a “junior MBA” course. This is in a country where rural kids often cannot complete their schooling due to lack of funds. More evidence of the overpowering march of globalization.

…Now the race starts early, with an emphasis not on ideology but on the skills and experiences the children will need in the elite life they are expected to lead. In addition to early golf training, which has become wildly popular, affluent parents are enrolling their children in everything from ballet and private music lessons, to classes in horse riding, ice-skating, skiing and even polo.

The intense interest in lifestyle training speaks not just to parents’ concern for their children’s futures but also to a general sense of social insecurity among China’s newly rich.

…FasTracKids [the “junior MBA” program], which started in Shanghai in 2004, has since opened two more outlets here and another in Guangzhou, and it is planning a fifth in Hangzhou.

The private program’s after-school sessions are held in brightly decorated classrooms, where fewer than a dozen children, typically 4 or 5 years old, are taught by as many as three teachers. The program emphasizes scientific learning, problem solving and, most attractively for many parents, assertiveness.

“Parents like myself are worrying about China becoming a steadily more competitive society,” said Zhong Yu, 36, a manufacturing supervisor whose wife is a senior accountant with an international firm and whose son 7-year-old son has been enrolled in the junior M.B.A. classes. “Every day we see stories in the newspapers about graduates unable to find good jobs. Education in China is already good in the core subjects, but I want my son to have more creative thinking, because basic knowledge isn’t sufficient anymore.”

Mr. Zhong said that for all of their high salaries, he and his wife had very demanding jobs with little leisure time, and the bottom line for them was “wanting our son to have a better life than we have had.”

To some extent, the trend is driven by a collision of rising affluence and China’s one-child policy, which forces parents to focus all their energy and resources on a single child. But experts say there is more at work, that it reflects fear of a new kind of rat race, in which the entire society is hustling for advancement.

“At the top of the pyramid will be exceptionally strong graduates from top American or European universities who become a sort of ‘international freemen,’ ” said Qiu Huadong, an author and editor who has written about the new elite. “They work several years in China, and then they go abroad for a while, shifting locations every few years. At the bottom of the pyramid will be those who didn’t get such an outstanding education, and they’ll be sweating and bleeding for China and globalization.”

Other experts say that for many others, the grooming schools, study abroad and lessons in elite sports like golf and polo are as much about a gnawing sense of social insecurity as they are about getting ahead.

“Americans respect people who came from nothing and made something of themselves, and they also respect rich people,” Mr. Wang added. “In China, people generally don’t respect rich people, because there is a strong feeling that they are lacking in ethics. These new rich not only want money, they want people to respect them in the future.”

The citadel of finance

Bloomberg is reporting that Citadel, another mega fund started by former physics major (Harvard) Ken Griffin, is negotiating to take over Amaranth’s energy positions. In the case of Long Term Capital, the Fed convened an emergency rescue by a consortium of major banks. The banks bought Long Term’s portfolio for pennies on the dollar, and eventually made a profit when spreads returned to historical values. Perhaps the only people hurt by this debacle will be Amaranth’s investors. Brian Hunter, the trader responsible for the losses, took home a bonus reported to be $100M last year, so I suspect he will recover just fine.

Few appreciate modern finance, in all its complexity and volatility. Even among practioners, there is a wide range of opinions concerning the value of their profession.

Position 1: This stuff is bullsh*t. But it provides the best risk-adjusted economic return for my high powered brain.

Position 2: If we can improve the efficiency of capital markets and resource allocation by even a fraction of a percent, the benefit to society over time is enormous, albeit invisible to the casual observer.

Charlie Munger, Warren Buffet’s long time investment partner, on the brain drain into finance:

I regard the amount of brainpower going into money management as a national scandal.

We have armies of people with advanced degrees in physics and math in various hedge funds and private-equity funds trying to outsmart the market. A lot of you older people in the room can remember when none of these people existed. There used to be very few people in the business, [and they were] who were not very intelligent. This was a great help to me.

Now we have armies of very talented people working with great diligence to be the best they can be. I think this is good for the people in it because if you know enough about money management to be good at it, you will know a lot about life. That part is good.

But it’s been carried to an extreme. I see prospectuses for businesses with 40-50 people with PhDs, and they have back tested systems and formulas and they want to raise $100 billion. [Reference to Jim Simons of Renaissance Technologies.] And they will take a very substantial override for providing this wonderful system. The guy who runs it has a wonderful investment record and his system is a lot of high mathematics and algorithms with data from the past.” […]

“At Samsung, their engineers meet at 11pm. Our meetings of engineers (meaning our smartest citizens) are also at 11pm, but they’re working on pricing derivatives. I think it’s crazy to have incentives that drive your most intelligent people into a very sophisticated gaming system.“

Blowing up is hard to do

Shades of Long Term Capital Management! $5B gone in one month thanks to leverage. Please ignore that the trader responsible was a 32 year old with physics and applied math degrees 😉

Big coverage in today’s WSJ: here and here. Turns out that Hunter was a huge risk taker with a troubled history at Deutsche Bank, who left and made Amaranth $1B last year. From the first WSJ article:

…A graduate professor of his was a leader in the emerging field of financial modeling and derivatives.

Mr. Hunter joined TransCanada Corp., a Calgary pipeline company that was becoming a player in the growing business of trading energy, rather than simply transporting it. The company would help customers like gas producers lock in prices for some of the fuel it shipped for them.

Mr. Hunter, then 24, came armed with fresh theories about options pricing and impressed his bosses with his ability to spot price anomalies. They gave him increasing amounts of money to trade with after early successes. Among them: He convinced them that options in Canadian gas were underpriced as a pipeline from Canada to Chicago was set to open and create a greater market for it.

“He helped us prove that mathematically…and it paid off hugely,” says Shondell Sabad, a former colleague there who now trades for a Calgary bank.”

Bloomberg:

Amaranth Says Funds Lost 50% This Month on Gas Trades

By Katherine Burton and Matthew Leising
Sept. 18 (Bloomberg) — Amaranth Advisors LLC, a hedge-fund manager with about $9.5 billion in assets, told investors its two main funds fell an estimated 50 percent this month because of a plunge in natural-gas prices.

“We are in discussions with our prime brokers and other counterparties and are working to protect our investors while meeting the obligations of our creditors,” Nick Maounis, the 43-year old founder of the Greenwich, Connecticut-based firm, said in a letter to investors obtained by Bloomberg News. The funds, which had gained 26 percent through August, are down at least 35 percent for the year, or about $4.6 billion.

Amaranth, which made so-called spread trades that try to profit from price discrepancies among futures contracts, is at least the second hedge fund to be hurt by this year’s tumble in natural gas. Last month, MotherRock LP, a $400 million fund run by former New York Mercantile Exchange President Robert “Bo” Collins, went bust after natural-gas futures fell 68 percent from
their Dec. 13 peak.

“The speed with which leveraged funds can evaporate is mind boggling,” said Mark Williams, a professor of finance and economics at Boston University specializing in energy markets. Earlier this month, Amaranth, named for an imaginary flower that never fades, bought a portfolio of gas trades from ABN Amro Holding NV that the Dutch bank took over from MotherRock. ABN Amro had lent MotherRock $60 million, and is still owed money by the fund.

Margin Calls Met

Amaranth is “near the end of our disposition of natural-gas exposure,” the letter said, adding the firm had met all margin calls, or demands from brokers for additional collateral to cover loans. Steve Bruce, an Amaranth spokesman, declined to comment.

Gas prices fell 12 percent last week as the U.S. Energy Department reported stockpiles climbed 12 percent above last year’s levels. Demand for the power-plant fuel usually declines after summer air conditioner use slows and before heating needs pick up.

Investors said the funds, Amaranth International and Amaranth Partners, wagered that the difference between futures prices for natural gas in the summer and winter months would continue to get larger, a trend that’s held since at least the beginning of 2004. Futures are contracts to buy or sell a commodity on a specific date at a preset price.

Spreads Narrow

Instead, the spread collapsed. The difference in price between the 2007 March and April contracts for natural gas peaked in July at $2.60. That shrunk to $1.15 by the end of last week. The spread between the two was about 75 cents today on the New York Mercantile Exchange. Spreads between March and April contracts in 2008, 2009 and later have also collapsed.

Investors in Amaranth included fund-of-funds managed by Wall Street banks including Morgan Stanley, Credit Suisse Group and Deutsche Bank AG, according to U.S. Securities and Exchange Commission filings. As of June 30, Morgan Stanley’s $2.3 billion Institutional Fund of Hedge Funds had $126 million, or 5.48 percent of the fund, invested in Amaranth.

The trader behind Amaranth’s natural-gas bets is Calgary- based Brian Hunter, who is co-head of the firm’s global energy and commodities business. As of June 30, energy trades accounted for about half of its funds’ capital and generated about 75 percent of their profits.

New Fund

Before joining Amaranth, Hunter, 32, was responsible for Deutsche Bank AG’s natural-gas trading desk from 2001 until 2004. Before joining Deutsche Bank he was an options trader and quantitative analysts for Transcanada Gas Services. Hunter graduated from the University of Alberta with a bachelor of science with honors in physics and a master of science in applied mathematics.

Maounis spun his firm off from Greenwich-based Paloma Partners in 2000. A convertible-bond specialist who worked at Paloma for 10 years, Maounis started Amaranth with 27 investment professionals and about $450 million in assets. The firm’s initial strategies included trading convertible bonds and the stocks of merging companies.

Amaranth had recently been marketing an energy and commodities fund, slated to open in December, which it said had a capacity of $5 billion, according to a marketing document send to potential investors. The fund was to be managed by Hunter and Jeff Baird, co-head of Amaranth’s Global energy and commodities business.

Perelmania II

I just received the following press release (?!?) from S.T. Yau’s attorney (actually, via a public relations firm, presumably retained by Yau or his attorney). Nasar and Gruber’s article on Perelman, Yau and the Fields medal was pretty tough on Yau, and I’m not very surprised by this response. If the authors and fact checkers can’t substantiate all the nasty things said about Yau, they’ll be quite sorry.

The formal complaint letter sent to the authors and the New Yorker is here. It is quite long and detailed.

Since I don’t want to be sued, I’m not going to comment on any of this 🙂

Harvard Math Professor Alleges Defamation by New Yorker Article; Demands Correction

Leading Math Scholars Decry Fictions Surrounding Fields Medal, Letter Says

BOSTON, September 18, 2006 – Pulitzer-prize winner Sylvia Nasar (“A Beautiful Mind”) defamed world renowned Harvard mathematics professor Dr. Shing-Tung Yau, in an article about a noteworthy mathematical proof in The New Yorker magazine entitled “Manifold Destiny” (August 28, 2006), according to a letter written by Dr. Yau’s attorney, Howard M. Cooper of Todd & Weld LLP of Boston. In the letter, Dr. Yau has demanded that The New Yorker and Nasar make a prominent correction of the errors in the article, and apologize for an insulting illustration that accompanied it.

“Beyond repairing the damage to my own reputation, we seek to minimize the damage done to the mathematics community itself, which is ludicrously portrayed as contentious rather than cooperative and more competitive than collegial,” Dr. Yau said. “Mathematicians from the foremost institutions – from Beijing to Berkeley – have been appalled at the fictionalizing of our profession.”

The attorney letter alleges that Ms. Nasar misrepresented her intentions in emails to him in which she claimed an interest in the “reuniting of physics and mathematics” and that she had been impressed with praise of his work from Stephen Hawking. Never during the three months in which she worked on the article, according to the letter, was Dr. Yau made aware of or asked to respond to charges leveled against him in the published article, claiming that Dr. Yau was trying to take credit for the solution of the Poincaré Conjecture away from Russian mathematician Grigory Perelman. Contrary to the article, there has never been a ‘battle’ over credit for the solution, said the letter. Many of the other scholars interviewed by Ms. Nasar report being similarly deceived, according to the letter, with one professor at the University of Michigan comparing her work to that of the notorious fabricator, Jason Blair of The New York Times.

Shing-Tung Yau, a professor at Harvard since 1987, who himself received a Fields Medal in 1982, holds today the nation’s highest science award, the National Medal of Science, awarded in 1997 for his “profound contributions to mathematics that have had a great impact on fields as diverse as topology, algebraic geometry, general relativity, and string theory. His work insightfully combines two different mathematical approaches and has resulted in the solution of several longstanding and important problems in mathematics.”

The allegations made in the letter will be discussed in detail in a webcast open to all interested parties scheduled for Noon EDT, Wednesday, September 20, 2006. Log in information will be posted on http://www.doctoryau.com. The letter sent to The New Yorker is available at his website.