Fast Moving Risk Appetite Challenges Quants

Chidem Kurdas

As markets take hairpin turns, being prepared for the worst has itself become risky. 

In response to bad economic news earlier this month there was a move to US Treasuries— regarded as the safe asset despite Uncle Sam’s burgeoning debt. Some funds traded on continued flight to safety in the highly uncertain environment.   But then investors turned around and went back into riskier stocks.

That appears to have tripped up certain quantitative strategies in late August, including Man Group’s AHL futures trading system.

Last week an AHL fund lost 2.8%. The program had taken defensive  positions, long on bonds and short on stocks and metals. These trades suffered from a rebound in riskier assets, Man Group says. One losing week doesn’t much signify—the fund is up 7.4% for the past 12 months. But it shows how hard it is to make money betting on dark prospects.

Bill Gross of PIMCO, another manager who went defensive, lost out in the Treasury rally. He remains skeptical of Treasuries, writing that “neither investor nor borrower may emerge from this brouhaha unscathed.”

If Treasuries aren’t safe, investing defensively becomes a whole lot more complicated.

According to the Wall Street Journal, Goldman Sachs suggested credit default swaps on European banks to hedge fund clients that share the gloomy outlook.   I would think that if you’re going to do that, you’d have to do it before it shows up in the WSJ.  The CSD will be pretty expensive by now.

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One Response to “Fast Moving Risk Appetite Challenges Quants”

  1. Absolute Return Bond MF Beats HFs « HedgeFundSmarts Says:

    […] known for managing hedge fund portfolios. PIMCO runs the world’s largest bond fund—its manager, Bill Gross, was in the news in recent months for selling Treasuries and losing money when investors flocked to Treasuries for safety. […]

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