Liquidation of Quant Hedge Fund Positions Behind Market Fluctuations?

This has not been a good year to run a quant hedge fund.

One after another, these "market neutral" hedge funds are getting taken apart, with most of the carnage coming this summer after the subprime credit blowout. Quant hedge funds are basically computer-run hedge funds that look for small discrepancies in the market to exploit. Most major firms such as Goldman Sachs and Bear Stearns run in-house quant funds and have made a lot of money over the last few years.

However, the party seems to have come to a crashing end over the past few months, with many of these "quant funds" dropping over 10% in just July alone. Considering that these funds are supposed to be risk averse and market neutral, this is a major blow. The computer models that drive these funds severely underestimated the amount of risk in the current market, and have paid substantially for it.

Based on several published reports that I have read, some of these notable quant funds have now been forced to liquidate some of their positions, which could account for some of the wild swings that we have seen in the market. It could be the reason behind the Dow Jones dropping over 100 points right now the close of trading earlier this week.

If these funds continue to take a beating then we are in for some serious trouble. If the Fed hadn't injected liquidity today, we probably would have been down another 300-400 points on the Dow and there would have been some major panic sinking in over the weekend. The question is, will we drop on Monday?

Filed under: Hedge Fund News | The Economic Meltdown | General Market News