Abstract During the week of August 6, 2007, a number of quantitative long/short equity hedge funds experienced unprecedented losses. Based on TASS hedge-fund data and simulations of a speci c long/short equity strategy, we hypothesize that the losses were initiated by the rapid \unwind" of one or more sizable quantitative equity market-neutral portfolios. Given the speed and price impact with which this occurred, it was likely the result of a forced liquida- tion by a multi-strategy fund or proprietary-trading desk, possibly due to a margin call or a risk reduction. These initial losses then put pressure on a broader set of long/short and long-only equity portfolios, causing further losses by triggering stop/loss and de-leveraging policies. A signi cant rebound of these strategies occurred on August 10th, which is also con- sistent with the unwind hypothesis. This dislocation was apparently caused by forces outside the long/short equity sector|in a completely unrelated set of markets and instruments| suggesting that systemic risk in the hedge-fund industry may have increased in recent years. http://web.mit.edu/alo/www/Papers/august07_2.pdf For interested parties : http://www.terrapinn.com/2008/qi/
I'm looking forward to a book detailing what happened from Aug 07 to the near future. Interesting times! Someone please write one (Richard Bookstaber are you listening?)
This is a grad student doing a paper. If you consider two things: 1. inflection point on the economic matter, and 2. the consequent requirement to limit data window, then you can see the why of things. Roll overs are often set on a 13 month standard in terms of initial sunk costs. It is a banking policy combination of how temp financing becomes long term financing. The student did not know the nonstationary window required, the landmarking requirement and he did not know when the inflection occurred. The inflection point was end of June 2006. See National Home Builders, et al. It is nice to run the quant hiring and firing data along side the key securitizations poop too. Too see how long the daisy chain is look at past inversions of savings interest rates.
Andrew Lo is a professor and director of the MIT Laboratory for Financial Engineering you idiot. Your attempt to impress with pseudo intellectual drivel is laughable. P.S. How did your scheme to turn $10 thousand into $1 million in 100 days work out? "we'll take a $10,000 account and we'll see how long it takes to make it to 100,000... and then we'll take the $100,000 account and make it to a million... with this group. and we're doing it now and i'm starting tonight... at approximately four times the rate i need to do it, to get it done in 100 days" http://www.mediafire.com/?1gi2qygm3yh
Lo's argument is very good and his simple trading model of shorting yesterday's winners and buying yesterday's losers closely correlates to the publicly available data of stat arb hedge fund performance. What I would like to know is which hedge funds liquidated in July/August 2007 and why? I've never seen anyone point fingers.
I have read some of Andrew Lo's other papers.....they all seem to be a good read. Some interesting ideas/concepts are discussed in them. I searched around using the Google Scholar search engine for the papers. Who cares whether or not a grad student is involved in writing the paper???????? It doesn't really matter whether its a high school kid or rocket scientist if the concept/topic of the paper gives you a new idea to profit from. Eric
In the November / December 07 issue of MIT's "Technology Review" magazine there is a good article which covers the topic of the August 07 Market Rout which contributed to negative performances in stat/quant funds. The article is about 10 pages, worth reading: http://www.technologyreview.com/magazine/119/