Quant Funds and the August Meltdown

[Chrisman886]

PhD fund is likely DE Shaw, but they only mention domestic equities for their producet in the article. DE Shaw is very active in international equities as well. So maybe it's something else.

[ImBetterAtGolf]

The writers of that story don't know which fund did what, so don't waste any time trying to figure out which funds they are trying to disguise. As I wrote above, the writers didn't get the details right and don't know themselves what you want to know.

[DcifrThs]

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PhD fund is likely DE Shaw, but they only mention domestic equities for their producet in the article. DE Shaw is very active in international equities as well. So maybe it's something else.

[/ QUOTE ]

nah:

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Let's create a hypothetical quant fund called the PhD Fund. The fund is owned by a big name Wall Street firm and is marketed on the street to wealthy individuals and institutions under the banner of a "market neutral" fund. This means that the net exposure for the fund is zero, or, in other words, the dollar amount of long positions in the portfolio is offset by the dollar amount of short positions.

The PhD Fund employs dozens of "propeller heads" (a hedge fund moniker for our mathematically inclined friends in quant shops). They build computer-based models that try to find and trade overvalued and undervalued stocks. Some of these models are longer term but some are short term, and so in order to trade in and out of these markets, these funds need to trade large, liquid positions.

The PhD Fund chooses to play in the US stock market because of this market's breadth and depth of securities. Let's assume that PhD Fund has dozens of measures for stocks in certain sectors and their models are constantly being built and augmented. They have income models that look at EBITDA, quarterly earnings, growth and more. They have balance sheet models that look at debt to equity ratios and book value, among other figures. They have technical models that look at short term momentum, daily volume, open interest and daily tic-by-tic trade data. You get the picture. These funds employ highly paid Gepettos, pulling the strings on computer models and trying to create money out of historical data.



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that has gotta be GSAM. i'm fairly certain of that.

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Meanwhile, across town, a competing quant fund called the Braniac Fund feared the market would worsen and hit the reset button, liquidated all positions and went to cash. They lost faith in their models and believed they could easily lose more money. In an effort to get some breathing room and reassess, they overrode their model: human intervention. The Braniac Fund posted a -30% loss for August and were lambasted by their peers for lack of faith in the computers.



[/ QUOTE ]

this, i'm less sure ie DE Shaw. the reason i think it is though is b/c i've heard some unsubstantiated rumors about the troubles it is in right now. i don't want to spin the rumor mill by conveying the exact extent of it but this being DEshaw would not surprise me.

alternitively, it could be AQR. but AQR is in stamford so not really "accross town." DEshaw on the other hand is in midtown while GSAM i think is downtown though i'm not sure where the global alpha offices are (could be midtown also).

i think rentech survived and probably flourished but who knows.

Barron

[ImBetterAtGolf]

[/ QUOTE ]that has gotta be GSAM. i'm fairly certain of that.

Barron

[/ QUOTE ]

What's the point of trying to decipher this story when the story itself isn't accurate?

[PRE]

The hedge fund I'm at is in an interesting run of events right now. Maybe I should create an "ask me" thread?

[DcifrThs]

[ QUOTE ]


[/ QUOTE ]that has gotta be GSAM. i'm fairly certain of that.

Barron

[/ QUOTE ]

What's the point of trying to decipher this story when the story itself isn't accurate?

[/ QUOTE ]

i thought it was an allegory?

i just thought by the general description fo the fuds. i knew global alpha was down like 22% or something more and then i thought it made back a ton of that loss by doubling down or "re-upping" or whatever and maybe finished slightly positive.

but like i said, "fairly certain" not 100%.

i dont think the story was necessarily correct though as he was simply using it as an example.

goldman seemed closest to me...if there are better ones that are more correctly described then lemme know.

thanks,
Barron

[ImBetterAtGolf]

I guess I wasn't being clear. The thinly veiled fund does sound like GSAM, but it is attributing actions to them that they didn't do. That is, the guys who wrote the story aren't that familiar with what really happened and what specific participants did.

[Jimbo]

[ QUOTE ]
I guess I wasn't being clear. The thinly veiled fund does sound like GSAM, but it is attributing actions to them that they didn't do. That is, the guys who wrote the story aren't that familiar with what really happened and what specific participants did.

[/ QUOTE ]

So you are forming your opinion on the validity of this article by assuming they are referring to a specific fund which you know didn't perform certain actions yet you aren't really sure what fund the article referenced in the first place?

Got it.

Jimbo

[DcifrThs]

[ QUOTE ]
I guess I wasn't being clear. The thinly veiled fund does sound like GSAM, but it is attributing actions to them that they didn't do. That is, the guys who wrote the story aren't that familiar with what really happened and what specific participants did.

[/ QUOTE ]

well, here is an article that i think proves that i don't know what i'm talking about:

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For years, Goldman Sachs Group Inc.'s flagship Global Alpha hedge fund could do no wrong. Over the past year, it has been able to do almost nothing right.
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August was the worst month in the fund's 12-year history; it was down 22.7% last month alone, according to a recent letter to investors. So far this year through the end of August, it was down 33.4% due to bad bets on everything from the Australian dollar, the Norwegian stock market and Japanese government bonds. The letter gave no indication about how the fund was faring this month. Over the past 12 months, the fund has lost 37% of its value.
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Two Goldman Stars
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That performance is a tough pill for Goldman and the two University of Chicago alumni, Mark Carhart and Ray Iwanowski, who run the fund. The pair had garnered accolades -- and made Goldman the envy of other Wall Street firms -- when Global Alpha was one of the best performing of the hedge funds set up by Wall Street investment banks. Mr. Carhart, an avid cyclist, and Mr. Iwanowski were among Goldman's highest-paid executives in recent years.
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Global Alpha, which has been marketed largely to Goldman partners and wealthy clients, was started in late 1995 with $10 million. In 1996, its first full year, the fund returned 140%, one former group member recalls.
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Global Alpha trades everything from currencies to stocks and bonds and uses a variety of strategies. It has been selling some of its investments, according to the letter, a decision that should help stem any further losses. "We are focused on ensuring that we hold a substantial amount of the portfolio in cash or available liquidity," the letter says.
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August was a difficult month for the overall markets, but even more difficult for a surprising number of hedge funds. Some funds that use a "quantitative," or "quant," strategy of using models to set strategies and computers to carry them out got clobbered when many of the funds wound up having to sell similar investments at the same time, driving prices down.
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Where's the Flexibility?
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Global Alpha's dismal record this year is especially startling because it is a "multi-strategy fund" and can engage in an array of strategies. In theory this should give it the flexibility to adapt to volatile and difficult markets and avoid problems arising from any single strategy. But over the past year practically everything Global Alpha touched went wrong.
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The problems show how one of the key dangers that have tripped up hedge funds in the current turmoil are strategies touted as unique but which channeled funds into very similar investments. Everyone got hurt when the investments wound up needing to be sold all at once. One investor in the fund described the losses as "shocking" that they could have lost money "across so many different strategies."
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Last year, the fund did well for the first few months but was down 9% for the year. Assets under management have slipped from a peak of $10 billion to about $6 billion, according to a person familiar with the matter, because of a combination of investment declines and withdrawals by investors. A Goldman Sachs spokeswoman declined to comment.
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August was difficult for some of the firm's other hedge funds, as well. Goldman, along with a small group of investors, stepped in this summer to provide a total cash infusion of $3 billion to its more-focused computer-driven stock fund, Global Equity Opportunities Fund. A Goldman spokeswoman declined to comment on the fund's losses.
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The letter outlined a litany of bad bets and problems, some of which the fund managers blamed on the massive selling by other funds as credit suddenly dried up in early August and investors in some funds started asking for their money to be returned. That forced many funds to sell assets to raise money. Most of those problems started in the market for subprime mortgages and then spread.
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The letter also says that bets that the Japanese yen would fall and the Australian dollar would rise turned out wrong. Those went badly when the disruptions in markets prompted many investors who had been borrowing money at low interest rates in Japan to invest elsewhere -- a practice that's known as the "carry trade" -- to abruptly reverse course and buy the yen while selling other currencies, such as the Australian dollar.
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'Very Poor' Currency Bets
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"In particular, we saw very poor performance in our currency selection strategies," the letter said. The fund also suffered missteps with bullish positions in the Norwegian stock market and bearish positions in the Finnish market. It lost money on both. Global Alpha's trading in world-wide bond markets didn't fare much better. It took a negative view on Japanese government bonds; they rallied instead.
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Global Alpha has struggled for some time. This time last year, Global Alpha also lost money shorting Japanese government bonds, or selling the bonds in the hope of buying them back later at a cheaper price.
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Earlier in 2007, Alpha was bearish on the Canadian dollar against the U.S. dollar. Yesterday, the Canadian dollar hit a 30-year high against the U.S. currency.


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though the article i think is an allegory (or fake story meant to resemble reality if that is the correct use fo the word), the fact it centers on stocks makes it less likely to be GSAM.

but, the fact that its selling was liquidity related and leveraged definitely hits home.

just the fact that goldman can lose that much in a month, or make that much in a year (22.7% and 140% respectively) says a TON about their risk management...namely that i think it might leave something to be desired. other funds don't hit it out of the park (140%) but they don't ever lose 22% in a month either (or 37% in a year).

from the article i can't tell if goldman doubled down or whatever in august (i.e. lost even more but then made it back by "trusting their model").

bottom line, good OP article and the above one about GSAM is interesting.

Barron

[smbruin22]

didn't read the article but wasn't quant long/short equity fund meltdown alot due to many funds owning the same stocks (and short the same).. . long alot of low value (i.e. low price/cash flow) with good momentum stocks. some of them LBO candidates. then lbo boom died. market got spooked by other things too and then there was some pressure on these funds, prices go down and now you have problems with more funds. so you have tons of sellers on stocks quant funds had gone crazy on (alot were small to mid caps and not that liquid).

outside equities, i think the carry trade got absolutely crushed. thinking of global alpha partially in this regard... and many hedge funds invested and/or ran CDO/CLO/SIV etc., many of which have been killed (some others have made a killing being short)

saw headline on bloomberg that global alpha may be down 60% for the year (including redemptions... so performance wasn't down 60%.. but say down 30% and 30% of the assets were redeemed)

i'm sure some of what i said isn't completely correct. but lots of press on the quants owning/shorting the same mid cap stocks and then some redemption pressure.