Reuters
- Quant hedge funds have been losing money steadily since early June.Atypically, this systematic drawdown can't be explained by a big sell-off or market volatility.Funds that have lost money include Qube, Point72's Cubist unit, and Man Group.
Quant hedge fund managers are experiencing one of the most prolonged droughts in recent memory. The bigger concern: They don't know why.
Systematic hedge funds have suffered a steady decline since June that managers are struggling to wrap their heads around. Quant executives, portfolio managers, and headhunters working in the space told Business Insider that the turmoil has hit most of the industry, generating concern and intrigue about the source of the pain.
"It kinda crept up on everyone as there weren't many disastrous days, but it's been small loss after small loss," said one executive at a quant trading firm, who wasn't authorized to speak publicly. "No one seems to know why this is happening."
Qube Research & Technologies, the $28 billion quant firm started by former Credit Suisse traders, has lost 5% in July in its flagship fund through last Friday, a person close to the manager said. The manager's larger Torus fund is down 7% in July, but both strategies are still up double-digits on the year.
Point72's Cubist unit has experienced one of its worst stretches since the pandemic slammed global markets in March 2020, two people familiar with the firm said. Two Sigma's Spectrum fund is down roughly 2% this month through the end of last week, a person close to the manager said.
At Man Group, the firm's AHL Dimension fund — a multi-asset systematic strategy — was down 2.5% in July through Tuesday, according to the London-based manager's website. Renaissance Technologies' largest external fund was down close to 6% in June, according to HSBC's Hedge Weekly report.
These firms declined to comment or did not immediately respond to requests for comment.
From the start of June through this Tuesday, equity quant managers lost 4.2%, according to a report from Goldman Sachs' prime services unit. The losses, driven by US equities, are the worst run of performance for systematic long-short strategies since a sharp drop at the end of 2023.
Quant distress doesn't necessarily signal broader market trouble, but severe losses can spill over — especially if a large firm dumps positions and sparks contagion. The S&P 500 is up nearly 8% since June, and the VIX — a measure of volatility — is at its lowest point since February.
Other prominent hedge fund strategies, including fundamental equity and multi-strategy, have steadily gained over the same period, the report said. Luckily for the quant space, it had been a strong year performance-wise until summer began, so the sector's annual returns are still, on average, outpacing their human rivals.
Goldman Sachs
A hallmark of statistical arbitrage, a classic quant trade that wields mathematical models to exploit short-term pricing inefficiencies across large baskets of stocks, is taking positions poised to pay off regardless of broader market swings. It has periodic slumps like any other trade, but they tend to be sharp and quick.
Major drawdowns often last just a couple of days and stem from a large player liquidating a portfolio or reducing market exposure.
Overcrowding can exacerbate losses, as it did during the so-called Quant Quake, in which systematic hedge funds such as Goldman Sachs' famed quantitative division suffered heavy, sudden losses in August 2007 while the rest of the market rallied.
What's unusual this summer, industry sources say, is the accumulation of small losses over weeks.
Goldman Sachs
"Everyone says it's different this time — different because of duration," said a hedge fund consultant who works with large quant funds. "This has been a long, slow bleed across the complex."
That pattern isn't consistent with a large liquidation and its aftershocks, though losses so far this week have been more intense, including a 0.6% decline on Tuesday, according to Goldman Sachs. The Goldman report said drivers included the sell-off of momentum strategies that bet rising stocks will keep rising; the rally in speculative, high volatility stocks; and "some unwinding of crowded trades."
Intense losses could quickly pile up if sizable funds start cutting their exposure.
"It's survival of the fittest, basically," said one quant trader at a multi-billion-dollar manager. "Who is going to have the stomach to ride this out and stick to their bets?"
