It’s been nearly a month since we first pointed out that quant funds were getting bloodied during the recent rally. Today Greg Zuckerman in the Wall Street Journal points out that this has continued:
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.
The great debate from here is whether this mainly raises questions about the sustainability of the rally or about the efficacy the quant models. Critics of the quants will point out that the quant bloodbath in August 2007 did not reflect or anticipate a broader market sell-off that summer. Supporters of quant strategies tend to answer that the dramatic market movements that summer were an early signal of the financial distress that eventually brought on the credit crisis and crushed Bear Stearns and Lehman Brothers.