Quant Funds falling out of favour

Market Turmoil Is `Perfect Storm' for Quant Funds (Update2)
By Alexis Xydias

Aug. 10 (Bloomberg) -- The turmoil in the equity and credit markets has created a ``perfect storm'' that led to losses for hedge funds employing mathematical strategies, according to a Citigroup Inc. strategist.

Most quantitative strategies, such as investing solely on the basis of share value or changes in analysts' earnings estimates, are resulting in declines, Manolis Liodakis, a London-based strategist at Citigroup, wrote in a report dated yesterday. The event is rare in an environment where volatility has increased.

``Nothing seems to be working,'' Liodakis wrote. ``Previously uncorrelated factors have recently been falling with the same pace, leaving investors with very few places to hide.''

So-called quant equity funds bet that shares with a certain characteristic will outperform another group. Criteria include earnings as a percentage of a company's share price, recent stock movement and prices relative to assets and revenue. Most of these strategies have lost money in the five days through Aug. 8, Citigroup's Liodakis wrote.

Stocks declined worldwide today as concern increased that a widening credit crunch may hurt economic growth and earnings. Morgan Stanley Capital International's World Index, a global measure for stocks, has declined 7.3 percent since reaching a 2007 high on July 19. The losses have wiped out more than $2 trillion from its member's market value.

Credit Spreads
Hedge funds' quant models have also been confounded by wider credit spreads stemming from losses in the subprime loan market.
The difference in yields between the riskiest corporate bonds and U.S. Treasuries has expanded about 1.5 percentage points since the start of June.

Goldman Sachs Group Inc.'s Global Alpha hedge fund fell almost 12 percent in the two weeks ended Aug. 3, according to two investors in the fund who declined to be identified. That brought this year's decline to 16 percent.

Funds run by Highbridge Capital Management LLC and Tykhe Capital LLC are also among those losing money in August, investors said.
The benchmark for U.S. stock volatility, the Chicago Board Options Exchange Volatility Index, surged to the highest in more than four years today on concern losses at hedge funds and in home loans to the riskiest borrowers will curb profit growth at banks and securities firms.

Citigroup's Liodakis wasn't available to comment on his report.