Managers of quantitative hedge funds are pointing the blame at each other stating all quantitative funds own the same stocks and use similar models, which caused them all to sell at the same time, driving down share prices, according to the Wall Street Journal.

In a letter to investors, Jim Simons of Renaissance Technologies wrote the quantitative funds behind the selling “undoubtedly shares some signals in common with our own, and the result has been losses.”

Securities and Exchange Commission filings show that as the end of June, quantitative hedge funds often shared large positions in the same stocks. For example, Renaissance held 1.1% of the shares outstanding of NVR Inc., a Virginia construction company, AQR Capital Management, held .9% of the company’s shares and quant fund Numeric Investors had a 1.6% stake.

The overlap was not limited to NVR. One hundred forty eight other companies with market capitalizations between $2 billion and 410 billion where large quant funds owned 5% or more of the shares outstanding, found Satya Pradhuman, director of research at Cirrus Research.

As a whole, those companies’ shares underperformed the shares of other madcap stocks during the selloff. 

History has shown that buying small and low multiple companies is beneficial, so many quant models screen for them. However, after the credit markets held up, worries about business risk rose, and the shares of those companies bore the impact of the selling.

Also, quant funds and investors started to cut positions in the stocks that sent the prices lower still.

Pradhuman believes that quantitative investing makes sense though. “Quant strategies may be getting broad-brushed,” he said. “In the long term, these are disciplined approaches that are doing things at every tick to look for value,” he said.

However, the risk to quantitative investing may be rising. Quant strategies share similar approaches to the market, and use the same statistical methods and similar academic papers and historical data. Due to this, similar conclusions can result amongst funds.

To stay ahead of the game, quant managers need to be more aware of what their peers are doing, said Massachusetts Institute of Technology finance professor Andrew Lo, who is also a principal at asset manager AlphaSimplex Group.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.

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