Now that nosotros are reasonably certain the fiscal globe is non coming to an destination yet, it is reasonable to inquire how quantitative strategies convey been faring nether this extreme marketplace stress. Despite reports of massive hedge fund deleveraging in addition to negative YTD returns, I believe quantitative strategies, peculiarly statistical arbitrage, convey survived the menstruum relatively unscathed. But hither are a few of my thoughts:
1) The paltry 10% annual returns that a mediocre statarb fund tin deliver is all of a abrupt looking pretty expert when the risk-free charge per unit of measurement is nether 1% in addition to a prolonged acquit marketplace is on the horizon.
2) Mean-reversal models operate on to crunch momentum models inwards this crisis environment, equally inwards previous crisis environments. This is non surprising because marketplace returns convey completely dominated specific returns, in addition to of kind marketplace returns convey been highly mean-reverting lately.
3) Models involving shorts are nether about tumoil because of regime-change induced past times novel in addition to ever-changing short-sale regulations. (For a while, I fifty-fifty convey difficulties locating SPY for hedging purposes!)
4) Models are mostly trained on information amongst far lower volatility than is of late realized. (Even incorporting VIX inwards a model does non guarantee that it tin agree realized volatility whatsoever better.)
As a result, P&L's fluctuations are too much higher than usual, which induces deleveraging equally a risk-management measure, which drains liquidity from the market, which inwards plow leads to even in addition to then higher volatility. The usual viscious cycle.
5) Political risks inwards an election twelvemonth convey farther reduced leverage in addition to increased volatility. What if at that topographic point is an assassination? What if the incorrect political party got elected? What if the paper-trailess electronic voting machines travail about other dispute for a month? The nightmares volition operate on at to the lowest degree until the morning time of November 5.
6) Normally, lack of liquidity inwards the marketplace is expert for statarb models since they net from renting out temporary liquidity. However, this profitability assumes that at that topographic point are buyers of terminal resort for the market: the long-term investors, the usual funds, Warren Buffet, etc. When they are absent, statarb investors tin live left asset the bag. Fortunately, Warren Buffet & Co. has indeed stepped inwards in addition to nosotros statarb traders tin breathe a sigh of relief.
7) I convey been paying item attending to three websites since the crisis began inwards club to guess whether I should provide to my normal leverage: the Ted spread (I am waiting for it to provide to below 2), the Calculated Risk blog, in addition to Paul Krugman's blog. This crisis is caused past times panic inwards the credit market, in addition to then nosotros should expect for credit marketplace returning to normal earlier declaring victory. The VIX? Not in addition to then much because I believe it is backward-looking inwards this environment.
8) Watching Fannie, Freddie, Lehman, AIG, WaMu, Wachovia, Iceland, in addition to the initial bailout neb failed feels similar reading Chapter eight of Harry Potter in addition to the Deathly Hallows: "The Ministry has fallen. Scrimgeour is dead. They are coming." The Dark Lord is taking over our economy.
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