What Happened to the Quants in August 2007?
Journal of Investment Management, Vol. 5, No. 4, Fourth Quarter 2007
Posted: 17 Jan 2008
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.
Keywords: Hedge Funds, quantitative market-neutral, long/short equities, August 2007
JEL Classification: G00
Suggested Citation: Suggested Citation