Eoin Murray, Head of Investment at Hermes Investment Management, discusses the recent ‘quantmare’ which took place in June:
Ever had a recurring nightmare? Markets are having one right now.
In August 2007, a small subsection of the global markets was hit by a violent sell off that preceded the financial collapse the following year. Those who lived through this episode still bear the scars. Market neutral strategies, which formed the liquid element of many multi-strategy hedge funds that were holding piles of illiquid credit, became the go-to element for fire sale in their portfolios – the easiest stuff to liquidate was equity factor exposure (today’s systematic beta).
As they did so, all factors started moving against these market neutral funds – including the one I was running at the time. The biggest fund to be hit was Goldman Sachs' Global Alpha. It had around $12bn in assets and was several times leveraged and prompted Goldman’s chief financial officer David Viniar’s famous quote: “We were seeing things that were 25-standard deviation moves, several days in a row” (sic!). The fund closed in 2011, with a mere $1.6bn left.