What Happened to the Quants in August 2007?
<-- Return to the list
Date: 01-31-2008
Start Time:
5:30pm
End Time: 7:00pm
Speaker: Amir E. Khandani & Andrew W. Lo, MIT
Location: The American Conference Center - 780 Third Avenue (between 48/49)
ABSTRACT
During the week of August 6, 2007, a number of quantitative long/short
equity hedge funds experienced unprecedented losses. Based on
TASS
hedge-fund data and simulations of a specific long/short equity
strategy,
we hypothesize that the losses were initiated by the rapid
``unwind'' of
one or more sizable quantitative equity market-neutral
portfolios. Given
the speed and price impact with which this occurred, it was
likely the
result of a forced liquidation by a multi-strategy fund
or
proprietary-trading desk, possibly due to a margin call or a risk
reduction. These initial losses then put pressure on a broader set
of
long/short and long-only equity portfolios, causing further losses
by
triggering stop/loss and de-leveraging policies. A significant rebound of
these strategies occurred on August 10th, which is also consistent
with
the unwind hypothesis. This dislocation was apparently caused by
forces
outside the long/short equity sector in a completely unrelated set
of markets and instruments suggesting that systemic risk in the
hedge-fund industry may have increased in recent years.
BIO
Andrew W. Lo
is the Harris & Harris Group Professor of Finance at the MIT Sloan School of
Management and the director of MIT's Laboratory for Financial Engineering. His
research interests include the empirical validation and implementation of
financial asset pricing models; financial engineering and risk management;
trading technology and market microstructure; hedge-fund risk and return
dynamics and risk transparency; and, most recently, evolutionary and
neurobiological models of individual risk preferences and financial markets. He
has published numerous articles in finance and economics journals, and is a
co-author of The Econometrics of Financial Markets and A Non-Random
Walk Down Wall Street. He is currently an associate editor of the
Financial Analysts Journal, the Journal of Portfolio Management,
and the Journal of Computational Finance. He is a former governor of the
Boston Stock Exchange, and currently a research associate of the National Bureau
of Economic Research, a member of the NASD's Economic Advisory Board, and
founder and chief scientific officer of AlphaSimplex Group, LLC, a quantitative
investment management company based in Cambridge, Massachusetts.
*There will be a cocktail following the event.
RSVP Required. To RSVP for NYQF Seminars, please complete the RSVP form.