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Are we about to experience a rerun of the summer’s pain for quant funds?

Rumours abound. Dealbreaker was last week on the trail of a mystery Boston-based fund, said to be liquidating positions. By the end of the week, Reuters was relaying that prominent funds had failed to navigate profitably the choppy markets, with the average fund down 3 per cent. Were the quants struggling again?

It might be an easy market in which to lose money, but the consensus seems to be that we’re not seeing the kind of orchestrated quant melt-down that occurred in August.

MSCI Barra have crunched some numbers on the dismal start to the year for European markets. The falls on January 21st, last Monday, were greater than any other one-day fall during previous crises over the last 10 years - an extremely broad-based event, affecting all countries, sectors, size segmenets and style segments, all more or less to the same degree. Only 10 of the 622 index constituents of the MSCI Europe index ended the day in positive territory.

In this way, the sell-off last Monday was similar in character to that on 16th August, as markets globally tumbled. The problems which hit quants funds earlier that month, says MSCI Barra, were narrower, picking off just specific style factors.

The man who explained August’s quantitative troubles has also weighed in. Lehman’s Matthew Rothman back in August argued that a few large multi-strategy quant managers had hit trouble in their fixed-income or credit portfolios, and so sought to raise cash in their most liquid area, the US equity market. As they moved to unwind their portfolios, it had perverse effects.

Short names started to rally and long names started to fall as these trades started to hit the market. As most quantitative managers use similar quantitative factors, this abnormal factor phenomenon was not confined to a few funds. Rather, a large number of quantitative managers have seen their models begin to behave in unexpected ways.

Rothman last Friday noted that quant managers had certainly found January challenging - with some funds experiencing painful underperformance. In fact, price momentum strategies experienced their fourth worst day since July 1950 on Wednesday as beaten down stocks (like the banks) soared and previous winners plunged.

But the backdrop is different. In early August, the general markets were relatively calm, with little company-specific or macroeconomic news, he argues. In the past week, there has instead been plenty to digest.

But in perplexing times, there is a tendency to point fingers towards those whose investment style and process are foreign, says Rothman.

Hence, many investors have taken an attitude of “It Must Be The Quants”, blaming them for that which is mysterious.

We do not believe it is appropriate in this case to look towards a general quant unwinding of portfolios as the source of the problem.

On the other hand, we do believe that it may be the case that an unwinding of a large portfolio significantly contributed to the recent dynamics in the market. Specifically, we are referring to the Societe Generale trading scandal that has come to light and the firm’s disclosure of its subsequent rapid selling of the rogue portfolio.