Why the Computer Models Misfired
LACK OF LIQUIDITY
When a computer program pinpoints a profitable hedge, the assumption is that there will be a buyer on the other side of the transaction when the deal is settled. But the turmoil in Russia and Asia so unsettled the markets that buyers disappeared.
BREAKDOWN OF PATTERNS
Usually, traders can hedge their bets by investing in many different geographical regions. But in recent weeks, the patterns have become synchronized, so that a decline in one region would no longer be offset by a rise in another.
LIMITED APPLICATION
Models that may be useful for countries with well-developed markets don't work well in smaller markets.
MISSING STREET SMARTS
Many mathematical geniuses with little practical experience in the markets have been hired on Wall Street. ''Black box'' models put on autopilot, without review or input by seasoned traders, can fail.
POLITICAL RISK
The models failed to assess realistically the risk that Russia would backslide so abruptly on the road to capitalism.
RELATED ITEMS
 - COVER STORY: FAILED WIZARDS OF WALL STREET
- COVER IMAGE: Misfire
- TABLE: Why the Computer Models Misfired
- CHART: One Way the Quants Got Creamed
- COMMENTARY: WHEN COMPUTER MODELS SLIP ON THE RUNWAY
- TABLE: A Rogue's Gallery of Failures
- ONLINE ORIGINAL: HEDGE FUNDS AND YOU: YES, THERE'S A CONNECTION
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