Burning of the Quants, redux

Discussion in 'Wall St. News' started by ASusilovic, Sep 21, 2009.

  1. Remember the summer of 2007, and the onset of the Credit Crunch, when all the equity quantitative strategies fell over?

    Well, it appears to be happening again.

    Note the equity quant report from Matthew Rothman, which popped out of Barclays Capital in New York late last week:

    We are not believers in superstitions, the occult, conspiracy theories, sun-spots, or horoscopes. But the date September 15th certainly seems not to be a particularly good one. Next year, we are planning to be far away from the markets, hopefully on an island, without access to a Bloomberg terminal or the Internet.

    We all remember the events of September 15, 2008; September 15, 2009 had nowhere near the same headline drama but ironically the performance of quantitative factors was considerably worse. This past Tuesday, we experienced large negative returns in all of our three major quantitative themes — Valuation, Quality and Market Sentiment.

    Specifically, on Tuesday, our long/short Valuation index returned -1.45%; our long/short Quality Index returned -1.47%; and our long/short Market Sentiment Index returned -1.75%. These returns are statistically significant and represent 3.3, 2.9 and 2.1 standard deviation moves, respectively, in the factors. We have not seen such poor performance in all of our factors on a single day since August 9th, 2007. Indeed, we have seen this level of misperformance on only 29 other occasions since July 1950 (approximately 15,000 trading days). To be clear, it is not the magnitude of the returns that is so unusual. Rather, it is the significant perverse performance by all of our factors at the same time that is eye-opening.

    What this gives us is an alternative depiction of what Rothman calls the “junk rally” - or the dash-for-trash in Alphaville-ese. Click to enlarge.


    Sadly, the quant team at BarCap are not quite sure what to do about this. Such losing streaks are too rare to be able to spot any pattern in the market’s response.

    Rothman & co wonder whether this has been caused by a major quant manager unwinding a position. Or it could simply be down to regular investors wanting to take more risk - and actively targeting stocks where short-interest is unusually high.

    Bears, as we know, are being roasted alive.


  2. They are the ones who established the model, if they don't know, the investors are doomed.

    Look at the bright side, it's not their own money they are losing, they don't feel the pain.