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Justin Grant
Justin Grant
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Volatility Derailed Quant Funds in Q3 and Clouds Their Outlook

Beneath the cacophony of screaming headlines about the European debt crisis, Occupy Wall Street and the slumping U.S. economy lays the struggles that quantitative hedge funds have recently endured.

Beneath the cacophony of screaming headlines about the European debt crisis, Occupy Wall Street and the slumping U.S. economy lays the struggles that quantitative hedge funds have recently endured.

Hedge funds just went through their worst quarter since the 2008 crash, and an industry source told me that quant-based funds were hit particularly hard during the period by wild swings throughout the global markets. The world's hedge funds lost 5.02 percent of their assets during the third-quarter, according to Bank of America's Hedge Fund Monitor, their worst performance since a 9.48 percent decline for Q3 of 2008. So far this year, hedge funds have fallen by 7.8 percent through the end of the third-quarter, according to the Dow Jones Credit Suisse Hedge Fund Index.

Quant funds apparently bore the brunt of those losses according to Steve Hotovec, the overseer of proprietary investing at Alchemy Ventures, which allocates $250 million to hedge fund managers through its risk managed account platform.

"The spike in volatility just killed the quants. And you got spillover into a lot of strategies that use quantitative techniques," Hotovec said. "That spike was spurred on by the fundamental deterioration of the European banking system. You've got 2008 over there."

Meanwhile in a move that led some market participants to question their commitment to quantitative trading strategies, Goldman Sachs opted to close the doors of its flagship fund Global Alpha after the $1.6 billion quant firm endured severe losses.

Looking ahead, the erratic markets that proved so hard to navigate for hedge funds during the third quarter are showing no signs of truly stabilizing as the year draws to close. Kenneth Heinz, the president of Hedge Fund Research, said in a statement that fund managers are doing the best they can to position themselves for continued volatility as the European debt crisis continues to play out.

As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio
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