According to the Wall Street Journal, two Goldman Sachs hedge funds are having trouble. The first of these revelations on Thursday seemed to trigger an acceleration of the market slide that began in Europe.
Apparently, the computer models that had proved so successful over the last few years caused large trading losses in the last three weeks.
Unfortunately, WSJ’s stories are not open to non-subscribers.
Blind to Trend, 'Quant' Funds Pay Heavy Price
Computers don't always work.
That was the lesson so far this month for many so-called quant hedge funds, whose trading is dictated by complex computer programs.
The markets' volatility of the past few weeks has taken a toll on many widely known funds for sophisticated investors, notably a once-highflying hedge fund at Wall Street's Goldman Sachs Group Inc.
Global Alpha, Goldman's widely known internal hedge fund, is now down about 16% for the year after a choppy July, when its performance fell about 8%, according to people briefed on the matter.
Second Goldman Hedge Fund Moves to Sell Some Positions
Just before the close yesterday (Wednesday), Goldman Sachs denied rumors that it was about to announce problems with one or more quantitative hedge funds. The Dow, which had tanked about a hundred points in a few minutes on the rumor, rebounded about a hundred points on the denial issued about 10 minutes before Wednesday's close.A second Goldman Sachs Group Inc. hedge fund has hit a rocky patch and has sold down some of its positions, according to a person familiar with the matter.
Goldman's North American Equity Opportunities hedge fund had $767 million under management earlier this year. The Fund was down over 15% this year, through July 27, according to investors and was down more than 11% in July alone. It is not known how much the fund has sold in recent days.
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Now maybe capital can be diverted into productive uses.
IIRC they weren't exactly swooping. The chairman of the NY Fed was pushing them hard to take over the positions.
It's the old GIGO problem - Garbage In = Garbage Out.
quants also get slaughtered (too many assume a fairly gaussian nature to the market, which is ABSURD)
we have had historically low volatility, both implied and actual (look at the VIX, the VXO or the ATR during trading hours). it's been a means reversion market, with HEAVY liquidity bubble (yen carry trade contributing etc.)
for what its worth, i trade futures (that's how i make my income), and today was the best trading day i have EVER seen in the dow futures market. simply INCREDIBLE.
Firms like LTCM and the current round of hedge funds that have blown most or all of their investors' money are perfectly happy to proclaim their own genius when they employ massive leverage to book large profits during calm markets. Crisis markets by definition make it impossible for risk reduction trades to be unwound. To claim "iliquidity" as the reason why their funds went bankrupt simply means that the folks managing these funds spent too much time studying advanced mathematics and too little learning the lessons of financial history.
Those of you who haven't read "When Genius Failed" by Roger Lowenstein about LTCM's disintegration should do so if only to see how short memories (in this case, something that happened only nine years ago) are on Wall Street.
Maybe I'm showing my ignorance, but how does this mean that the fund is "in trouble"? A 15% drop over six months and an 11% drop over one seem like par for the course in a high-risk, high-potential-reward investment. Anyone in a hedgefund that panics over those kind of figures is in the wrong investment
If the 11% loss in July was independent of how the Goldman Sachs fund was going to do in August, then you would be absolutely correct.
Unfortunately, that fund is almost certainly doing worse this month, and efforts to deleverage by selling off assets in the current market where there is almost no liquidity (meaning no one willing to step up and buy securities of uncertain value) could lead to a catastrophic collapse in the remaining asset value.
I think the problem is that the report is unclear as to what exactly is down 11%. If the equity in a highly leveraged fund is down that much it could in fact be serious trouble. For example, 50% leverage would mean that the equity investors were down 22%, and so on.
I'm not saying that's what's happening, just that the report is unclear.
What does happen of course is that in a heavily leveraged position, the value of partner's equity can change dramatically with limited moves in the underlying positions.
There share of the economy is trivial.
They goofed. They are supposed to get wiped out.
Where are all the free-marketeers and libertarians when you need them?
This is good news, even if, unlike whit, you're not trading futures. Best economic news I've seen in a long time, in fact.
If the prognosticators are right that it will reduce M&A fever, then it's even better.
Have you read "The Black Swan"? It sounds like something you would like. I'm most of the way through it now.
Crisis markets by definition make it impossible for risk reduction trades to be unwound.
How are you defining "risk reduction trades"? Seems to me there are some things that would still work in "crisis markets". Although that depends on how you define that term as well.
By their nature, rare events don't happen often enough to extract robust, reliable data on their frequency and magnitude. My understanding is that a typical "quant" response to this is to simply ignore the tails. Too hard to deal with. Too much uncertainty. An inability to arrive at precise answers, if you tried to include knowledge on the tails.
Of course, just ignoring the tails doesn't make them go away.