Many funds employing quantitative strategies are currently under pressure as recent conditions have resulted in significant market dislocation. Across most sectors, there has been an increase in overlapping trades, a surge in volatility and an increase in correlations. These factors have combined to challenge many of the trading algorithms used in quantitative strategies. We believe the current values that the market is assigning to the assets underlying various funds represent a discount that is not supported by the fundamentals.
Goldman Sachs explaining the need for a $3bn bailout of the bank’s Global Equity Opportunity fund after heavy losses. Goldman will lead a group that includes CV Starr, led by Hank Greenberg, Perry Capital and Eli Broad, the real estate entrepreneur.
$3bn? And this isn’t the fund that most of the concerned chatter has been concerning – that was the Global Alpha fund, reported to be 26 per cent down for the year. The North American Equity Opportunities fund has also been reported to be in trouble. The bank on Monday acknowledge that life at those two funds is also no picnic, but added: “at their current levels of equity capital, we believe the funds are positioned to actively pursue market opportunities.”
The Street.com reports that Goldman has put in $2bn of the funds itself to GES, which was valued at $3.6bn at the end of last week.
Peter Cohan at BloggingStocks fires off some initial questions:
What happened to GEO’s $3.6 billion net asset value? How will the $3 billion in cash be spent? Why couldn’t Goldman bail itself out of its own mess? What rights will that $3 billion entitle these investors? Why are these investors making the investment?
The FT’s Lex column meanwhile is agog at the quantocide all around. What has gone wrong?
Along with the rather large estimate that $1,500bn of funds could be in the hand of the quants, Lex comments that in the current environment – with managers moving to reduce risk where they can, not necessarily where it is highest – assets prices do not behave as expected, and previously uncorrelated strategies converge.
Our old friend leverage amplifies matters. Lex writes:
Whether quant funds bounce back largely depends on whether or not the deleveraging process — a rational response to changed conditions in itself — has gone far enough. The danger is that bad news out of the fixed income market continues, prompting further rushes for the exit. Meanwhile, the steady release of monthly performance data, both official and unofficial, in the coming weeks could prompt indiscriminate redemptions, sparking a “run on the bank” at some funds. Like their scrambling managers, some investors will also be tempted to cash in what they can, rather than what they want.