Not exactly a totally new topic on this board, but here is a very interesting article regarding quant hedge funds, factor-based models, correlation, and everyone running out the exit door at the same time:
http://financial.seekingalpha.com/article/45122
And an associated article from Pensions & Investments:
http://www.pionline.com/apps/pbcs.dll/article?AID=/20070820/PRINTSUB/70817032/1031/PIIssueAlert01
Another interesting article about quant funds on WSJ,
http://online.wsj.com/article/SB118791448211107333.html?mod=2_1154_1
Quote:
A number of quant funds, which use statistical models to find winning trading strategies, reported heavy losses this month. In many cases, the managers pointed their fingers at other quantitative hedge funds, essentially saying they all owned many of the same stocks and their models told them all to sell at the same time, driving down the share prices, hurting everyone in the process.
Mr. Pradhuman found 473 small-cap stocks, with market capitalizations of $250 million to $2 billion, where the quant funds owned 5% or more of the shares outstanding. These stocks also performed worse than other similar stocks.
To stay ahead of the game, quant managers need to be more aware of what their peers are doing, said Massachusetts Institute of Technology finance professor Andrew Lo, who is also a principal at asset manager AlphaSimplex Group LLC. By the same token, if the losses this summer drive some investors out of quantitative strategies, it could be good for the quants that are still in the game.
Thanks for the links.
The letters from the fund managers were particularly good to read. (http://web1.webbox905.server-home.net/files/sorry-all.pdf).
The letter from Black Mesa Capital was my favourite. It outlined their struggle and the reasons behind their decisions in good detail. They come across as a very discretionary fund mamager, whereas the letter from Renaissance Technologies portrays their funds as computerized trading systems with no discretion, using language like “system” and “signal”.
The letter from Sowood is the most tragic, stating that they sold out completely to another Investment group, losing 51% to 57% year-to-date.
I would have liked to read the letters from Goldman Sachs though, but they were not included. A week or so ago Bloomberg stated that their Global Alpha fund was in 44% drawdown since March 2006. Part of the losses was due to a decision to exit the JPY carry trade and go long AUD, which fell sharply shortly after.
Around 20% of investors had notified their decision to exit the fund in July. Imagine that you handed a good sum of money to the most intelligent and highly respected guys in the financial markets, confidently thinking “how could they do wrong?”, and then end up losing 44% of it. That’s, for example, a loss of 440,000 dollars from a 1,000,000 dollar investment.
