Andrew Lo on the Quant August to Remember

Whether you’re a quant, or just someone interested in modern capital markets, MIT’s Andrew Lo’s new working paper on the causes of the August quant fund troubles is required reading. There is thoughtful stuff on overcrowded strategies, shorting difficulties, increases in required leverage, asset growth in long/short market neutral, and Patient Zero in the August meltdown.

The closing section, in particular, where Lo takes a “small world” network view of the hedge fund industry is fascinating. Who is connected to whom, and how has that changed in the last decade? While data is difficult to get, Lo does back into his analysis in some interesting  ways, including the following figure, which shows how strategies have become increasingly correlated over time, suggesting a close network among funds and their holdings.