Ten years ago, during the second week of a sultry New York
August, Michael Mendelson was getting a sandwich at the Subway
shop near the Greenwich, Connecticut, office of AQR Capital
Management when all hell broke loose. As Mendelson glanced at
his BlackBerry, out of nowhere, it seemed, AQRs funds
were in the red.
Very quickly, losses started snowballing, with AQRs
flagship fund down 13 percent during the first ten days of
August before recovering all of it by months end.
You didnt know how far it was going to go,
recalls Mendelson, a principal at AQR.
AQR was not alone. Some of the biggest and smartest hedge
funds in the world suddenly tumbled in tandem, as their
algorithmic trading systems went haywire.
As the events unfolded, other hedge fund managers scurried
from their idyllic Hamptons retreats to contain the damage and
lashed out at the quants, who turned out to be massively
overleveraged and highly correlated triggering an
unwinding that was a preview of a collapse that would befall
the financial world a year later. These damn
quants. They couldnt get a date in high school, and now
they fked my month, was the joke Peter
Muller, who was running a secretive internal quant fund at
Morgan Stanley at the time, liked to tell afterward,
paraphrasing the frustrated fundamental managers.
But to everyone making high-stakes computerized investment
bets, it wasnt funny it was shocking. We had
never seen anything like this before. . . . We were trained in
statistics. For all intents and purposes this shouldnt
have happened, says a manager of a major quant hedge fund
who lived through the event, sleeping in his Wall Street office
to try to contain the damage.
After a four-day quant rout, the Dow fell almost 400 points,
then began to recover, with little overall effect on the
market. But several funds ultimately did not survive the chaos
that started that summer. Goldman Sachs Asset Management, which
in 2006 ran the largest hedge fund empire in the U.S.,
eventually ended up shuttering two of its most prestigious
funds, Global Alpha and Global Equity Opportunities, after
losing billions of dollars. Tykhe Capital, whose funds had lost
between 17 percent and 31 percent by August 9, also eventually
The brutal reckoning has been permanently seared into the
memories of the math geniuses running such heralded names as
Goldman, Renaissance Technologies, and AQR all of whom
seemed to have had no clue why their rational world was
suddenly turned upside down. It also spooked investors for
years afterward, as they shunned the quants and the inscrutable
black boxes they run. Then, quietly, money began filtering back
into the strategy. In 2010 managed futures started to come
back; by 2013 a full-blown resurgence in quant equity funds was
Now the nerds can get all the dates they want. These days
the hype about quants is impossible to ignore, owing to a
combination of performance and a flood of assets into the
strategy. Alphas Rich List of top-earning hedge fund
managers was dominated by quant managers this year, and the
Wall Street Journal detailed the quants rise in a splashy
multipart series. Meanwhile, investment firms are hiring Ph.D.s
mathematicians and computer scientists at a
record pace as they look for new ways to differentiate
themselves in a technological arms race. Everyone is talking
about using big data, the type of information that comes from
web scraping, social media, satellite imagery, and credit
Todays quants dominate the top tier of hedge funds and
account for 17 percent of all hedge fund assets. Since 2010
systematic strategies have taken in 29 percent of hedge fund
inflows, which is approximately two times their share of total
hedge fund industry assets, according to a recent Barclays
report that estimates quants now manage about $500 billion,
double the amount they held in 2007.
Moreover, the top seven quants now run $373 billion
thats more than 10 percent of all hedge fund assets.
These include the U.K.s Man Group and Winton Group and
U.S. firms Bridgewater Associates, Renaissance, AQR, D.E. Shaw,
and, perhaps most notably, Two Sigma, which has been the
biggest beneficiary of the boom. In 2007 it had only had $3.7
billion in assets, but it now runs $39 billion, making it the
fifth-largest U.S. hedge fund. AQRs firmwide assets had
ballooned to $195 billion as of June 30.
Even non-quant hedge funds like Dan Loebs Third Point
and Dmitry Balyasnys eponymous shop are getting into the
act. Steven Cohen, who has long had an internal quant strategy
at his hedge fund and now family office, has reinforced his
commitment to the strategy by investing $250 million in
Quantopian, a quant trading startup.
With the money pouring in and the hype machine working in
overdrive, however, some insiders who remember the events of a
decade ago are starting to whisper: Will quants
newfound success lead to another meltdown one perhaps
even bigger than before?
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