Interesting article here in the WSJ this evening. The last time this happened was right near the market peak of 2007.
Quants are back to wearing boots at work. But they aren’t dealing with another 100-year flood, just yet.
A number of quantitative hedge funds have been crushed lately, even as the stock market soars, causing a stir on Wall Street. These funds, which rely on sophisticated computer models, generally have beaten the market over the past few years. But they have suffered sharp losses in short time spans, such as in August 2007. That is something their whiz-bang models said was almost impossible, raising questions about their approach.
Some are taking on water yet again. Jim Simons’s RIEF fund fell more than 16% this year, through April 24, while two big funds operated by MAN AHL, the largest publicly traded fund, are each down about 10%, investors said. Some trend-following funds, which had positioned themselves for more market troubles, have lost as much as 10% in the past month or so.
Troubles in quant land sometimes are a canary in the market’s coal mine; when their computers are off kilter, it can suggest trouble below the market’s surface. In August 2007, for example, the troubles reflected moves by some big investors to dump positions to slash their level of borrowed money, steps that foreshadowed similar moves by other investors in the subsequent months.
Things aren’t as troubling this time around. A number of big quant funds are doing well, including those focused on statistical arbitrage, making it harder to generalize about a quant rout. Funds operated by AQR Capital Management are up more than 10%, while D.E. Shaw is making money. Mr. Simons’s Medallion fund continues to print money, investors said.
What has really happened is that quants, with a strategy of focusing on high-quality companies and betting against riskier shares, are getting clobbered. The market rally has been led by growth stocks, bombed-out financial shares and companies with poor balance sheets and lower profit margins.
The troubles of some big quant funds raise as many questions about the sustainability of the market’s recent surge as they do about the efficacy of their models.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.