A handful of quantitative hedge fund managers have now confirmed the tales of woe that are flying around in cyberspace.
Renaissance Technologies said in a letter (via Here is the City) to its investors that the fund had lost 8.7 per cent in the first few days of August - and hinted that funds employing similar strategies to Renaissance could be to blame.
While we believe we have an excellent set of predictive signals, some of these are undoubtedly shared by a number of long/short hedge funds. For one reason or another many of these funds have not been doing well, and certain factors have caused them to liquidate positions….All of this may not influence the direction of the overall market, but it may certainly alter the relationships of stocks to each other in a dramatic way.
Tyhke also came clean in a missive to investors, published on Dealbreaker, with losses of between 17 per cent and 31 per cent in the month to date.
And the latest numbers from Goldman’s Global Alpha fund puts the bank’s flagship fund down 26 per cent for 2007, reported Bloomberg on Friday. On Monday, the news wire added that the bank’s Global Equity Opportunities Fund was down 13.9 per cent in the year ended July 31.
The situation at Goldman has become so dire, reports the WSJ, that the bank will on Monday put out a statement and hold an unscheduled conference call to walk investors through what is going on in its funds. The story adds that Barclays Global Investors‘ 32 Capital Fund will also provide a weekly update on its performance - expected to say that the fund’s performance has been “challenging” but that it had not faced large-scale requests from clients seeking their money returned.
And there are more names out there. Dealbreaker offers us AQR and Caxton. Fintag is still employing his patented search-engine rumour collection methodology to look out for the latest funds to hit trouble. (Both incidentally are convinced that DE Shaw has something to tell us.)
The WSJ, which on Thursday, told us that “computers don’t always work“, had more on Saturday. Matthew Rothman, head of the quants at Lehman, had this to say:
Wednesday is the type of day people will remember in quant-land for a very long time. Events that models only predicted would happen once in 10,000 years happened every day for three days.
The Naked Capitalism blog speaks for those of us who don’t have a PhD: “The spreadsheet isn’t real. And no matter how many hours you spend huddled over Excel, you can’t make it so - life is just a fundamentally messier business than the cells can cope with.”
It is patently absurd to talk about a “one in 10,000 year event” for markets and instruments that clearly won’t exist in 10,000 years….How can you judge what would be a “one in every 10,000 year” event, much the less a “one in every 100 year event” when you have at most 10 or 20 years of data?
Human behaviour tends to form a great big stumbling block, much to the disappointment of the rocket scientists. Exhibit A - Professor Robert Merton’s comments to the FT earlier this year arguing that the LTCM model was robust. The problem was its counterparties’ behaviour.
The WSJ reports a similar story. Quant-fund managers are meant to remain a zen-like calm in the face of market turbulence. But PhDs or not, they haven’t done so this latest time round, amid panicked selling.
Lehman’s Rothman appealed for calm last week: “Self-fulfilling prophesies of losses can come true if investors stampede and head for the door in unison,” he said. “We certainly hope this situation does not materialise and stress the need for investor calm.”
Yet again Sartre was right: no matter how hot your model is, “hell is other people”.
