Tag: research affiliates

The trouble with Quants

During the week of August 6, 2007, many large and previously successful hedge funds were forced to de-lever their portfolios and liquidate commonly held securities, resulting in simultaneous drawdowns of 30%, 50%, or worse.

After all, the quant funds of 2007 shared the same structural flaws as the highly engineered financial trading strategies that caused the stock market crash in 1987 and the implosion of Long-Term Capital Management in 1998.

At first, the identified predictability in security price movements is reinforced as funds using the quant model, along with similar funds using similar models, begin buying and selling the same securities.

To facilitate the use of leverage, risk models were used to minimize country, sector, and other common factor risks.

Read more here: http://researchaffiliates.com/ideas/pdf/fundamentals/Fundamentals_Aug_2011_The_Trouble_With_Quants.pdf