Yet another ‘quant tremor’ strikes systematic investors

{"text":[[{"start":6.6,"text":"Last year was characterised by an unusual number of minor “quant quakes” that shook different systematic investment strategies in different ways and at different times — which we dubbed “quant tremors”. "}],[{"start":18.9,"text":"As Alphaville wrote in our review of the phenomenon:"}],[{"start":22.2,"text":"Hedge funds that rely on sophisticated modelling and systematic trading have been rattled by a series of mini-crises that insiders say have been mildly reminiscent of the violent “quant quake” that rattled the entire industry in August 2007. "}],[{"start":37.2,"text":"To be clear, this has on the whole not been a bad year for most quants. It has just been riddled with an unusually large number of these mysterious, often unsettling, quant tremors. And to the bafflement of even many industry insiders, the impact has often been extremely varied, with some firms hardly noticing certain quivers but getting severely rattled by other ones."}],[{"start":61.900000000000006,"text":"Well, it looks like we now have a rerun of last summer’s quant-rattling “garbage rally” in more volatile, often heavily shorted stocks. "}],[{"start":70.35000000000001,"text":"On Monday evening, Goldman Sachs’ prime brokerage emailed clients to say that they estimate that quants had just suffered their worst five-day performance since December 2023."}],[{"start":82.10000000000001,"text":"A kind soul forwarded the report to us, and here’s the chart that shows the drawdown for systematic long-short funds in terms of the z-score (the standard deviations away from the average):"}],[{"start":null,"text":"

"}],[{"start":92.55000000000001,"text":"Interestingly, it also seems to be a broad-based quant tremor, with strategies in the US, Asia and Europe all getting whacked at the same time. "}],[{"start":null,"text":""}],[{"start":100.50000000000001,"text":"In simple percentage terms, those five days equated to a 3.1 per cent aggregate loss for quant strategies tracked by Goldman’s prime brokerage, with 1 per cent coming on Monday alone. "}],[{"start":113.10000000000001,"text":"“As in recent drawdowns, the pain was concentrated in the short leg of the portfolio,” Goldman’s analysts noted, with crowded trades and momentum getting pummelled. In other words, junkier stocks have rallied hard and hurt systematic shorts — in an eerie echo of what we saw at almost exactly the same time last year. "}],[{"start":133,"text":"Quants were still up 11.3 per cent so far this year, as of Monday, according to Goldman’s calculations, so this is hardly a catastrophe. But Alphaville hasn’t been immediately able to find out if things have improved or worsened since its report came out. "}],[{"start":148.7,"text":"The investment bank’s custom indices for non-profitable tech stocks and heavily shorted stocks — decent proxies for garbage — have climbed 1.8 per cent and fallen 0.5 per cent respectively since Monday, so it’s hard to draw firm conclusions. Last summer the pain was mainly focused in statistical arbitrage hedge funds, but we haven’t heard whispers of any particular victims. "}],[{"start":169.14999999999998,"text":"Anyway, we thought it was worth highlighting in case it morphs into something more violent for markets as a whole. We suspect it’s merely further evidence of how small quant tremors are becoming more common — as we argued last year — but you never know."}],[{"start":182.89999999999998,"text":"Further reading:— Inside the ‘rolling thunder’ quant crises of 2025 (FTAV)"}],[{"start":194.59999999999997,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1782996007_7677.mp3"}