Cross-Asset Quants Are Facing Their Worst Losses in a Decade
By Dani Burger @daniburgrMore stories by Dani Burger Bloomberg.com Hawkish signals from central bankers have punished stocks and bonds alike in the past week.
Also punished: investors who make a living operating in several asset classes at once. They’ve been stung by the concerted selloff that lifted 10-year Treasury yields by 25 basis points and sent tech stocks to the biggest losses in 16 months. Among the hardest-hit were systematic funds who -- either to diversify or maximize gains -- dip their toes in a hodgepodge of different markets all at the same time.
Losses stand out in two of the best-known quant strategies:
1. Trend-following traders known as commodity trading advisers, and
2. Risk parity funds.
CTAs dropped 5.1 percent over the past two weeks, their worst stretch since 2007, according to a Societe General SA database of the 20 largest managers. The Salient Risk Parity Index dropped 1.8 percent, the most in four months.
To a category of critics, it’s an environment where the potential for snowballing losses becomes greater, as the overseers of such funds take steps to reduce risk. So many face losses at once, the theory goes, that a chain reaction of selling ensues with the potential to whack markets further... On the surface, it’s strange that both strategies suffered over the past week since they’re supposed to behave differently.
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