Its Official: Hell Freezes Over

Last week, hell froze. The Financial Times reports:

In a rare unplanned investor call, the bank revealed that a flagship global equity fund had lost over 30 per cent of its value in a week because of problems with its trading strategies created by computer models. In particular, the computers had failed to foresee recent market movements to such a degree that they labeled them a ‘25-standard deviation event’ – something that only happens once every 100,000 years or more.

“We are seeing things that were 25-standard deviation events, several days in a row,” said David Viniar, Goldman’s chief financial officer.

Losses in the Goldman fund could go over $1.5 billion. But heck, everyone makes mistakes. And even a great mathematician such as James Simons, founder of Renaissance Technologies, takes a loss from time to time. Simons used to do math for the Pentagon. Then, he discovered that he could make billions running a math-based hedge fund. But last week, Simons was forced to write a letter to his investors. His fund lost about 9% in the first few days of August…and now Simons says, “we cannot predict the duration of the current environment.

So apparently, math whizzes find they don’t know which way the market is going, despite all their fany financial modeling and risk calculation and mitigation through the use of derivates.

No matter what kind of math you do, sometimes things take you by surprise.

According to Nassim Nicholas Taleb’s latest best seller, The Black Swan: The Impact of the Highly Improbable , improbable events with infinitely small odds of occurrance seem to occur every so often, especially in the financial markets. And with disastrous results!

And if this wasn’t enough, Sentinel Management Group, with $1.6 Billion under “management” has frozen access to Money Market Accounts!
According to the Chicago Tribune,

“If you attempt to withdraw money from Sentinel, they will tell you they will not honor that request,” said lawyer Jeffrey Barclay, who represents some of the futures brokers and investment pools whose money is frozen at Sentinel.

With $1.6 billion under management, Sentinel had advertised itself as an ultrasafe cash manager for people in the futures industry, corporate treasurers and well-to-do individuals.

Now the company is saying nothing publicly and has taken down its Web site. “We are not taking any media calls,” said a person who answered the phone at Sentinel on Wednesday.

What is the world coming too?

Related Readings:

1. The Black Swan: The Impact of the Highly Improbable

2. Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets

3. When Genius Failed: The Rise and Fall of Long-Term Capital Management

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