Today, when all the dust settles, "quants" will almost certainly have witnessed a huge bounce between the liquidated long vs. short positions, perhaps on the order of 3 to 5%. This is as massive a one-day convergence upon diversified portfolios as was the unprecedented just-seen divergence.
Having seen many puked-out evidenced by the price action, the question is: Who held their nerve, and not only didn't cut, but doubled-up?? Those who didn't puke will see some reasonable rate of P&L recapture. Those who increased later from positions of low leverage will be net positive, while those who cut last will be lamenting their actions. We'll know shortly who'll be getting blue ribbons...
cassandra -- you clearly were right; all the quants seem to have reported much smaller losses after friday. but i am curious why you were convinced friday would be a much better day for the quants than for the broader market? i.e. you presumably have a sense of what a typical quant portfolio looks like in order to infer that friday's moves would really help them.
ReplyDeletebsetser
Hi Brad,
ReplyDeleteYou live in the arcane macro world of watching reserves and inferring the where, why and how...indeed a most important pursuit.
I inhabit the micro-world equities, their price moves, inferring the where, why and how to attribute cause and effect to all the plausible (and occasionally less-plausible) "factors" at my disposible.
Wednesday and Thursday & of course the Friday bounce were three of the wackiest days I've seen. Not THE wackiest, pretty-well damn close.
I saw factor and strategy-represenative 40-stock long vs. 40 stock short portfolios move 10% in a day, with the eshort side moving up that amount. Talk about lottery-ticket odds!! Friday saw similar convergence (in the USA) and MOnday, again was a large convergence day.
The thing is: anyone who deleveraged or cut locked in losses, and the snap back was more rapid and onlower volume than the puke, so there was likely a net-loss of wealth to the stat arb community.
tis true, your world is very different from my world. equities are not my thing -- i don't even pay as much attention to the indexes as i should (my background is on the policy side, and focused on currency and fixed income markets).
ReplyDeletebut i wonder if you might be able to share a bit about why specifically the tail end of the week was wacky.
I gather that things the quants were short rallied and things the quants were long tanked, but i don't have an intuitive feel for the kinds of stocks (sectors, names, etc) that the quants were long, and the kind of stocks the quants were short. which means i don't have a good feel for how to evaluate arguments like "how could you prepare for a week when quality tanks b/c there were forced sellers and crap rises b/c of buyers unwinding shorts ... "
for example, were folks long financials b/c their they have a relatively high earnings yield?
or were they long something else ...
cassanddra -- the last comment was from bsetser
ReplyDelete