Quants take it on the chin again. This time, the miscue was a wrong-footed bet on stock price appreciation. From Bloomberg:
Some European quantitative funds that bet on rising stock prices may have lost 15 percent this month as equity markets declined, according to strategists at JPMorgan Chase & Co.
Fund managers using mathematical formulas to pick trades helped fuel the sell-off that wiped out almost $400 billion in value from the Dow Jones Industrial Average from July 19 to Aug. 16. It worsened as client redemptions created “magnified losses,” according to Marco Dion and Matthew Burgess, JPMorgan analysts in London, in a report today.
Managers counting on rising stock prices to boost returns found the opposite this month as Europe’s Dow Jones Stoxx 600 Index dropped 8.1 percent through today, headed for its biggest monthly decline since 2002. U.S. stock declines wiped out the 2007 gain of the Standard & Poor’s 500 Index as it fell 0.1 percent through Nov. 21. Asia stock indexes also have fallen.
“Undoubtedly there will be some pretty horrendous numbers coming out,” said Magnus Spence, chief operating officer of London-based fund manager Dalton Strategic Partnership LLP, which oversees $3.5 billion. “A lot of mutual funds got aggressive investing in long-only funds” after August, when widening credit spreads and increased stock-market volatility jarred the computer models used by many quantitative funds.
Long-only managers concentrated in Asian stocks could be down 10 percent or more, said Spence, whose firm manages eight long-only equity funds. Declines in shares of Taiwanese firms and mining stocks also will cause losses, he said.
“We haven’t seen many redemptions ourselves, but I wouldn’t be surprised if investors in general are starting to” put in requests, Spence said.
Asian stocks advanced Nov. 22 for the first time in seven days, helped by gains in technology shares. The MSCI Asia Pacific excluding Japan Index added 0.4 percent to 507.52 at 6:03 p.m. in Hong Kong, halting an 8.3 percent drop.
Quant fund managers forced to sell securities in recent months found that many peers owned the same holdings and ran similar computer models….
“We expect some long-only quant managers, regardless of their strategies, to be down at least 10-15 percent for the month,” Dion and Burgess of JPMorgan said in their report.
“Movements like we’ve had in this month almost never happen,” Dion said in a telephone interview today from London. “The previous three times they were linked to serious historical events, Long-Term Capital Management, the World Trade Center attack and Worldcom.”…
Compounding problems have been so-called value stocks, or shares that are inexpensive stocks relative to their earnings, have been outpaced by faster-growing stocks, Dion said.
“Most of the quant funds are involved in value, not growth, creating a sort of double-whammy for long-only quants,” he said. Dion declined to name funds that could be losing money and estimated long-only quants account for about 15 percent of European hedge-fund investments.
European hedge funds oversee about $538 billion in assets, according to HedgeFund Intelligence Inc., a London-based research firm.
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“Movements like we’ve had in this month almost never happen,” Dion said in a telephone interview today from London. “The previous three times they were linked to serious historical events, Long-Term Capital Management, the World Trade Center attack and Worldcom.”
Get ready for “36 sigma” explanations … for why you don’t deserve any of your money back.
“Movements like we’ve had in this month almost never happen”
Except in 1998, 2001 and 2002.
And the collapse of the Worldcom scam is now a “world historical event.” Somebody tell Hagel.
Do these people even listen to themselves?
“Compounding problems have been so-called value stocks, or shares that are inexpensive stocks relative to their earnings, have been outpaced by faster-growing stocks, Dion said.
“Apparently, equity style performance moves in cycles,” the JP Morgan analyst added. “Who knew?”
“`Movements like we’ve had in this month almost never happen.” I’m ROTFL with everyone else.