An Ugly Summer for Quantitative Hedge Funds
Yesterday, I published an article on Fool.com concerning the travails that quantitative funds suffered during the latter half of July and August. Although I based the article on the conclusions of a report by Citigroup A Challenging Environment for Quant Strategies, I later found out that Andrew Lo of MIT had written a paper on the same topic.
As an aside, Lo is an MIT academic who is a luminary on hedge fund returns and risks. Interestingly, I found that Lo’s conclusions on the causes of failure of the quantitative strategies were different from those that Citigroup produced.
Although both reports found that one of the causes was “crowded strategies”, i.e. too many funds pursuing the same strategies, and therefore holding the same positions, Citigroup emphasized the fact that a major reversal in a number of popular return factors (notably price reversal, style and market capitalization) appeared to have taken place. This would suggest the presence of a fundamental and, more importantly, enduring shift in these factors. On the other hand, Lo hypothesizes that the upheaval created by the liquidation of positions by a single institution triggered mass liquidations across quantitative funds.
Two different hypotheses – it’ll be interesting to see which one reveals itself to be true over time.
Total: 207 words (very short!)
Time: 10 minutes (not including spell check)
*** The above text was written (and spell-checked) in ten minutes. As a result, some of it may not stand up to rational scrutiny. I apologize preemptively for any errors, omissions and misrepresentations. ***