Strategic Investment Group

Lessons from the Quant Quake

September 2007

Quants, the investment managers who run quantitative strategies, are a highly trained, rational, and analytical lot. Skilled in mathematics and statistics, they use multi factor computer models to construct portfolios. But during the four days spanning August 7-10, 2007, their risk-controlled world was rocked by an event rarer than a 10-point earthquake. Suddenly, the value and momentum factors on which many quant strategies rely started simultaneously underperforming the overall market by enormous margins. Leveraged, market neutral quant strategies, in particular, began to hemorrhage, some incurring double-digit losses within a single day. The damage was both pervasive and massive, affecting dozens of firms and hundreds of billions of dollars in markets worldwide. By the end of Thursday, August 9, even veteran quant managers were shaken, incredulous, and grim-faced as they surveyed the carnage on their computer screens. They were looking at an event which statistically should not be expected to occur even once in a thousand years.

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