Friday, April 17, 2009

Open Letter To Quant Funds

In his April 14th report Matt Rothman wrote about a dramatic, parabolic outperformance trend for names with high short interest, low prices and fundamentally weak names. He opined that all conditions for this trend to end are in place. Contrary to his very valid arguments, the trend accelerated yesterday.

Stocks with poor fundamentals, market share losses and poor earning prospects that quantitative managers tend to short, gained more than higher quality long positions.

It is clear from Mr. Rothman's report that this trend is a main contributor to outsized losses for quant managers. Some of his respondents admitted to hitting P&L stops. Recent acceleration of this trend, aka the "crap rally" clearly further damaged quantitative managers performance and resulted in further hits of P&L stops. The resulting short covering and long index hedges have perpetuated the market rally for now.

At this point, it is hard to say what set off this process, but it is currently accelerating and feeding on itself.

From the timing of Mr. Rothman's poll of quant managers, it is clear that smaller managers had ample time to exit positions and get flat. Continuation of the "crap rally" could indicate larger, systematic problems at the largest, most sophisticated quant managers.

We are paging Jim Simmons, DE Shaw, Citadel, LSV, Jacobs Levy and "significant"' others. Are you all right? We need you alive, small and nimble, to help provide liquidity and maintain orderly markets, not outsized, bigger than the market and dead.

If you still can, please come out and speak up before it is too late.

Disclosure: SNDK picked randomly as an indicative example, Zero Hedge has no exposure in any SNDK securities. Sphere: Related Content
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