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Is there enough diversity of thought on Wall Street?

In a recent interview, one expert worries that investors in one market sector – hedge funds – are increasingly moving into similar positions, which could lead to crowded trading. That could be a problem. 

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Mark Lennihan/AP/File
The American flag and a sign for Wall St. are shown outside the New York Stock Exchange, in New York July 18. One investment author argues that investors relying on too much of the same information can be problematic if it leads to crowded trades.

Michael Mauboussin's book about untangling the results we generate from skill and from pure luck lit up the investment biz upon its release last fall. Since then, his work has been widely referenced virtually everywhere people are seriously trying to understand results and randomness.

Quick shameless plug - Michael Mauboussin is a confirmed speaker at Barry's conference this October, we'll have more details in the days to come but you should save that date if interested...

Anyway, Shane at Farnam Street has a new interview with Mauboussin posted at his site, here's one exchange in particular I found interesting, about the diversity of thought among professional investors:

It seems that today, more than ever, people are going to Wall Street with very similar backgrounds. How do you see the impact of this?

"For the last few decades Wall Street has attracted a lot of bright people. By and large, the folks I deal with on the Street are smart, thoughtful, and motivated. The key to robust markets and organizations is diversity of thought. And I don’t personally find such diversity greatly lacking.

There are a couple of areas worth watching, though. There does seem to be evidence that hedge funds are increasingly moving into similar positions—often called a “crowded trade.” This was exemplified by the trades of Long-Term Capital Management. Crowded trades can be a big problem.

Somewhat related is the world of quantitative analysis. Many quants read the same papers, use the same data sets, and hence put on similar trades. We’ve seen some hiccups in the quantitative world—August 2007 is a good illustration—and there may well be more to come."

Head over for the whole thing, it's a good interview.

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