We’re coming to this a little late, but the content of a November 3 Barclays Capital quant report is so intriguing we thought it still worth posting.
To cut to the chase, Matthew Rothman, of BarCap’s US equity quantitative strategy team, talks about what he terms “conventional received wisdom” that a “market event” occurred on or around Wednesday October 21. He also reflects upon the “disruptions” BarCap quant funds experienced in September — although rest assured everything is back to normal now, according to the analyst.
Here are the highlights (our emphasis):
Sometimes it is a nice thing that past performance is no guarantee of future performance — especially if your past performance is of the variety we experienced last month. The old adage about October being the worst month for stock returns was not true for our model performance, this year. Our long-short market neutral quantitative portfolio was up +3.39% this past month. Our long-only large cap enhanced index portfolio outperformed its Russell 1000 benchmark by +2.48% this month. All three of our quantitative themes delivered positive returns this month as well. Our Value Theme returned +4.21%. Our Quality Theme was up +1.99%. And the Market Sentiment Theme was up +4.32%.
This strong rebound in performance gives us additional confidence in our hypothesis that some of last month’s poor performance was due to a market disruption occurring in the quantitative asset management space. As we wrote last month, all three of our quantitative themes underperformed for the month by statistically significant amounts. This is an uncommon occurrence that we have seen only on a handful of occasions dating back to 1950. This month’s reversal is consistent with a dissolution of the market pressure.
But we are well aware: past performance is no guarantee of future performance. We just take it one month at a time. Given the frequency though that we are asked about disruptions in the quantitative asset management space, we think it is worth reiterating our opinion on what makes an event look like a “disruption”. Simply, large negative returns to a single quantitative theme does not mean to us that a disruption is occurring — especially when it is coincident with another theme having large positive returns. To us, this signals a rotation is occurring in the market. So this past month, when our Value Theme was outperforming and our Sentiment Theme was underperforming, we saw this as a normal rotation taking place in the market. There are times when Sentiment will work and there are times when it will not and sometimes the failures of the Sentiment Theme may be large. Investors are known to shift their strategies, often abruptly.
But this is not synonymous to us with a “quant unwind” or a “disruption”. We see that occurring when none of our Quantitative Theme portfolios are working. When all the factors that a quantitative manager would normally be long are systematically going down and when all the factors that a quantitative manager would normally be short are systematically going up is the time when we most clearly believe you can point to a significant liquidation event happening. Again, we see it as style rotation when an individual themes experiences perverse performance and another individual theme experiences superior performance.
And regarding the so-called October 21 event:
While this distinction may seem obvious to the diligent readers of our work, we are asked about market disruptions with startling frequency. Hence, we believe this point is worth repeating — not every abrupt turn in the market is due to the quants.
Finally on this topic, it seems to be conventional received wisdom that a market event occurred on or around Wednesday October 21st. We have heard many stories about what may or may not have occurred; we have no first-hand knowledge of any of it and know no one who has first-hand knowledge of any of it — it is always somebody else that somebody knows who heard about this or that occurring. We found no one who themselves has direct knowledge — a condition was raises our skepticism antennae ever higher. What we do know for sure is that none of our themes exhibited significant abnormal negative returns (see Figure 1) and certainly not all of them. In summary, we just don’t see any evidence of a market event occurring.
Hmmm.
Related links:
Burning of the Quants, redux - FT Alphaville
What went wrong – and right – for quants in August – FT Alphaville