Abstract

http://ssrn.com/abstract=1015987
 
 

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What Happened to the Quants in August 2007?


Amir Khandani


Massachusetts Institute of Technology (MIT)

Andrew W. Lo


Massachusetts Institute of Technology (MIT) - Sloan School of Management; Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL); National Bureau of Economic Research (NBER)

November 4, 2007


Abstract:     
During the week of August 6, 2007, a number of quantitative long/short equity hedge funds experienced unprecedented losses. Based on TASS hedge-fund data and simulations of a specific long/short equity strategy, we hypothesize that the losses were initiated by the rapid unwind of one or more sizable quantitative equity market-neutral portfolios. Given the speed and price impact with which this occurred, it was likely the result of a forced liquidation by a multi-strategy fund or proprietary-trading desk, possibly due to a margin call or a risk reduction. These initial losses then put pressure on a broader set of long/short and long-only equity portfolios, causing further losses by triggering stop/loss and de-leveraging policies. A significant rebound of these strategies occurred on August 10th, which is also consistent with the unwind hypothesis. This dislocation was apparently caused by forces outside the long/short equity sector - in a completely unrelated set of markets and instruments - suggesting that systemic risk in the hedge-fund industry may have increased in recent years.

Number of Pages in PDF File: 67

Keywords: Hedge Funds, Long/Short Equity, Liquidity, Statistical Arbitrage, August 2007

JEL Classification: G10, G12, G20, E44

working papers series


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Date posted: September 21, 2007 ; Last revised: January 17, 2008

Suggested Citation

Khandani, Amir and Lo, Andrew W., What Happened to the Quants in August 2007? (November 4, 2007). Available at SSRN: http://ssrn.com/abstract=1015987 or http://dx.doi.org/10.2139/ssrn.1015987

Contact Information

Amir E. Khandani
Massachusetts Institute of Technology (MIT) ( email )
77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States
Andrew W. Lo (Contact Author)
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
100 Main Street
E62-618
Cambridge, MA 02142
United States
617-253-0920 (Phone)
781 891-9783 (Fax)
HOME PAGE: http://web.mit.edu/alo/www
Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)
Stata Center
Cambridge, MA 02142
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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