The Bamberger version of statisticall arbitrage was driven by two key ideas. The main source of alpha was
the short term reversal effect we had discovered in 1979/80. The main tool for risk reduction was to divide the universe of stocks into industry groups of from two to thirteen stocks and trade each group separately on a dollar-neutral basis. Thus the portfolio reduced risk from the market and various industry factors. To back test the system and to simulate real-time trading, we drew upon Princeton-Newport’s 1,100 square foot computer room filled with two million dollars worth of equipment, a domain ordered, organized and overseen by Steve Mizusawa. Inside were banks of gigabyte disk drives the size of washing machines, plus tape drives and CPUs the size of refrigerators. All this sat on a raised floor consisting of removable panels, under which snaked an ordered jungle of cables, wires and other connectors. The room had its own halogen system. In case of fire the room flooded with non-combustible“halogen” gas automatically within 80 seconds. Once this happened the room had too little oxygen for fire to burn or for people to breathe. We drilled on how to get out in time and how to trigger the halogen manually, if necessary. This was high tech in the mid ‘80s. It has since been obviated by the enormous increase in computer miniaturization, speed, and cheapness. Now, for instance, hard disks the size of a CD can hold several gigabytes.