« London as Theme Park for Billionaires | Main | Breaking Up Yahoo, Part II »
Latest Stories
- Quote du Jour: Kill Me, Sure. But Save the Ozone.
- Interview with a (Fake) Hedge Fund Manager
- Reason # 7,732 Why Yahoo Management is Delusional
- First Faux Apple 3G iPhone Teardown
- New York as (Financial) Tech Startup Hub
October 5, 2007
Further Misadventures in Quant Land: Bad for the Grass
I'm hearing from a few sources out in quant funds that troubles are building again. After August's misadventures when quant funds lost upwards of 8 percentage points in some cases, things settled down for a while in September, and even bounced back to flat in many cases.Now, however, the bleeding has apparently begun again. More than a few quant funds are seeing a steady 10 basis point loss on an almost daily basis, and that is happening across all quant strategies.
The culprit? No-one knows for sure, but a reasonable guess is that a host of smaller recent arrivals to the business, and some incumbents, are being forced to steadily unlever their portfolios.
Where many of these funds had ratcheted things up to high levels of leverage to deliver results in the increasingly crowded quant long-short neutral market (see the following figure), that leverage is now being dialed back. The inevitable result: Falling prices on long bets, and increasing prices on shorts -- both of which are bad for the grass (to borrow from Chinatown).
Sphere It
| 
Digg it
| 
Bookmark it
| 
Stumble it
What is a quant fund? The definition is so wide and varied that to apply a singular model and analysis to the entire genre is unsophisticated.
A mark to market high frequency algorithmic trading fund is technically a quant fund. So is a mathematically based, mark to model fund that focuses on third and higher level derivatives. How can they be assessed the same way and all labeled quant funds? Answer -- they cant.
Also, I'd be curious to hear more about your "few sources" giving you this info because a.) this type of info is highly guarded and b.) extremely hard to aggregate into any meaningful analysis.
The same basic problem as with the over-proliferation of hedge funds: circular firing squad.
Can anyone tell me/ verify the source of the data in the article?Is there an update for 2008?
Source is MIT's Andrew Lo's "August quant meltdown" paper available at his site.
Hello Paul,
Is it possible that this scaling back of leverage is the reason why trading volume has been relatively light since the first signs of quant fund trouble began in early August?
Thanks