One did not need a computer to predict the decline of quantitative management

The amount of money managed by so-called quant funds has dropped by up to 40 per cent in the past six months, as the drawbacks of the once rapidly growing strategy have been laid bare by the credit market turmoil.

Quantitative management, which uses computer models to make trading decisions, is behind the success of some of the best known hedge funds and institutional managers. Some estimates pegged the amount managed this way at about $500bn before the slump hit.

However, those using the strategies concede that they were unaware of how popular quant investing had become, and how many quant managers were doing the same trades. As a result, managers deleveraging in times of market turmoil would exit the same trading positions as many other managers, resulting in sharp losses for several previously high-flying funds.

Is commentary even needed, here? Deterministic trading methods were shown to be pretty garbage back when I did my two (utterly wasted) undergraduate semesters in Finance. In fact I learned more from Econometrics than Finance (precisely why quantitative skills are so important!). I’m sure these computer programmes are making quite sophisticated decisions, but when many others are making the same decisions, those trades become enormously foolish ones, timing-wise.


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