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Seminars

Where have all the Stat Arb Profits Gone?

Date: 01-28-2008
Start Time: 6:00pm
End Time: 7:30pm
Speaker: Andrew J. Sterge, AJ Sterge Division of Magnetar Capital, LLC.
Location: 412 Schapiro CEPSR, Davis Auditorium

ABSTRACT

Profitable statistical arbitrage depends to a certain extent on frictions in the price discovery process. The advent of decimal pricing for US stocks eliminated a prime source of frictions in the trading process. In this presentation I suggest that decimal pricing not only reduced frictions but also had a dramatic effect on the stochastic behavior of cross-sectional stock prices.

BIO

Andrew J. Sterge is President of the AJ Sterge Division of Magnetar Capital, LLC. In this capacity Mr. Sterge manages Magnetar’s reinsurance investments and quantitative trading strategies. Additionally, Mr. Sterge serves on the Board of Directors of Pulsar Re, Ltd., including on the Underwriting Committee of the Board. Mr. Sterge is Portfolio Manager for the Magnetar Risk Linked Fund, which invests its assets into Pulsar Re.

In 2004 Mr. Sterge founded AJ Sterge Investment Strategies after 15 years at the Cooper Neff Group, the last four of which as the firm’s Chairman and Chief Executive Officer. AJ Sterge Investment Strategies pioneered investment strategies in reinsurance and various segments of the equity and fixed income markets. AJ Sterge Investment Strategies was acquired by Magnetar in April 2006.

Mr. Sterge joined Cooper Neff & Associates in 1989 as Director of Options Research. In this position, Mr. Sterge developed options pricing models which captured the effects of fat-tailed and skewed distributions, as well as investors’ relative risk aversion for the downside versus upside insurance aspect of options. Mr. Sterge was promoted to Partner in 1993. Prior to joining Cooper Neff, Mr. Sterge was employed by CoreStates Financial Corporation where he was Assistant Vice President trading interest rate options from September 1986 to November 1989.

In 1991, Mr. Sterge founded a new variety of short term equity trading based on models of stock market microstructure, or how stocks’ bids and offers evolve over time and in response to order flow and other information. Called Active Portfolio Strategies, this business flourished following the acquisition of Cooper Neff by Banque Nationale de Paris (now BNP Paribas) in 1995. Effectively, an internal hedge fund strategy, Active Portfolio Strategies at times managed well over $20 billion in global equity positions for BNP Paribas. Mr. Sterge’s groundbreaking strategy was profiled in a December 1997 front page Wall Street Journal article titled “Trading by the Numbers.” Mr. Sterge’s strategy remains the centerpiece of BNP Paribas’ proprietary equity trading.

In May 2000, Mr. Sterge created the CooperNeff Risk-Linked Assets Fund, one of the first hedge funds dedicated to exploiting inefficiencies in the reinsurance markets.

Mr. Sterge is a 1981 graduate of Wake Forest University where he received his Bachelor of Science degree in Mathematics. He was awarded the Kenneth Tyson Raynor Math scholarship in 1980 as well as the John Y. Phillips Prize in 1981, given to the senior who most excels in the study of mathematics. Mr. Sterge received his Ph.D. degree in Mathematics from Cornell University in 1985. His doctoral thesis built a mathematical model of coalition formation in a voting context. As an application, Mr. Sterge measured the relative importance of voters in the United States Federal Legislature. In addition to his academic credentials, Mr. Sterge published an article for the May/June 1989 issue of the Financial Analysts Journal entitled “On the Distribution of Financial Futures Price Changes”.