Even though quantative funds have been in existence for decades, they have only come into mainstream during 2006. Many of the top 20 hedge funds have some form of quantative methods of investment. These quant-funds utilize algorithmic trading, also known as black-box trading that uses mathematical based computer programs to enter trade orders, with the math algorithm deciding many aspects of the trade such as price, size of order, and hedges. The algorithm takes advantage of for example – various types of arbitrage and even-driven opportunities, so long as the market is imperfect. Such methods are helpful in managing market risk in the sense that the electronically based models make decisions much quicker than the decision process of human. Many of the institutional hedge funds have hired brilliant PhD’s in physics, math, and computer science to build these mathematical based models and update them as the market changes. As the computers take over many tasks that used to be executed by humans, the role of responsible fiduciary becomes vague, and often neglected. Of course, the most obvious disadvantage is that the model is still built by humans, and there can always be mistakes built into the model. At the same time, such mathematical algorithms can be reverse engineered. For example, if the algorithm has been deciphered by a competitor, the competitor can “front-run” the order, which means buying at a discount before the algorithm initiates buy orders. As the market changes, these models have to be constantly updated to ensure that the model is step ahead of its competitors, because the slightest technological advantage can mean an extraordinary amount of profit or loss. During the credit meltdown in the second half of 2007 and early 2008, the data has shown that these quant-funds have suffered huge losses, up to billions of dollars, with some top funds down -30%.
With millions and even billions of dollars earned each year, the elite hedge fund managers on Wall Street can have much leverage in the upcoming elections in terms of contributions. Republican presidential candidate John McCain seems to be the most likely candidate for receiving the hedge fund contributions, as hedge funds have traditionally supported fiscally conservative candidates and tax cuts. On the other hand, Democratic presidential candidate Barack Obama constantly talks about getting tough on the wealthy, and backs a legislation called the Stop Tax Haven Abuse Act that limits offshore accounts of wealthy hedge funds. But to many people’s surprise, many of the top 10 hedge fund managers have contributed money to Barack Obama. In many respects, Obama is relatively new to national politics and has many seats to fill in this inner circle. McCain has already established his buddies from the worlds of banking decades ago. Though Obama has taken a stand on changing the politics of lobbying, so it remains to be seen how much influence these hedge fund managers can get through political contributions to Obama. Reuters has reported that Obama has received $822,375 from hedge funds, compared to McCain, who received $348,300.
On the economic front, the commodity traders are under scrutiny for jacking up the prices of crude oil on pure speculation. Many agree that the degree to which the speculative trading took place nearly doubled the price per barrel since last year. Many economists have modestly set the price of oil at $65-$75 per barrel given the good old traditional supply and demand model, and that’s after accounting for the ever increasing demand for energy from the emerging markets in China and India. But in the futures market where many institutional fund managers with billions of investment dollars all chime in on the pure speculation for future price hike cash-outs, the demand suddenly climbs more than the market equilibrium and creates the current state of hierchies of speculation. This is also a subliminal “test” to see how much rational human beings are willing to pay for convenience. To some extent, we’ve slapped ourselves in the back of the hand. Instead of treating oil as luxury, we treat it as a necessity for everyday living. Instead of taking public transportation, we drive gas guzzling SUVs and trucks, stuck in traffic without being qualified for HOV. The environmental policies prohibiting drilling within the states also reduce the supply of oil in such a tight market that is sensitive to the slightest change in supply or demand. Take the attack by rebel groups on the Nigerian off-shore oil drill for example, the crude oil per barrel jumped on the news. When the Chinese government announced the 18% increase in gas prices, the price per barrel dropped five dollars in premarket. The new mortgage bill that is suppose to provide $300 billion is foreclosure prevention is encouraging even more moral hazard in the financial market, for both the irresponsible banks and some greedy individual property investors. These are the people who took on risks as much as 20 times its books. The $300 billion will come from more taxes, which will only contribute to an even more vicious cycle of downfall. As for the recent boost in oil prices that benefited the Arab countries, the situation also presents a dilemma. Although some experts estimate that the some UAE countries have as much as $1.5 trillion in foreign reserve built up from oil, there are just as many problems to deal with. Saudi Arabia still has a 30% unemployment rate, in which only 1% of the population is directly affected by the oil business. Since much of the land in the UAE is deserts, water becomes a scarce resource to be imported for drinking and irrigation. Given the lack of arable land, UAE members have signed contracts in other third world countries for farmland rights to produce food and import them from countries such as Egypt, the Philippines and Cambodia, and other similar countries that can’t even feed themselves. By increasing the demand of food on the global market, food prices are tightened along with oil prices.
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