What Happened To The Quants In August 2007?
The Academic World is quick to follow this round. It's only September and people have come up with research papers on the Quant Fund drama last month.
A word of caution though, the paper is some 60 pages long and nice looking formulas start to show up on page 7. For us non-math-holic kind, this summarizes it pretty well:
During the week of August 6, 2007, a number of high-profile and highly successful quantitative long/short equity hedge funds experienced unprecedented losses. Based on empirical results from TASS hedge-fund data as well as the simulated performance of a specific long/short equity strategy, we hypothesize that the losses were initiated by the rapid unwinding 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 sudden liquidation by a multi-strategy fund or proprietary-trading desk, possibly due to margin calls 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 on August 9th by triggering stop-loss and de-leveraging policies...
