The August 2007 quant crisis (which lasted a week) had little to do with mortgage bonds and a lot to do with crowded factors (cf yield, I remember specifically) and leverage. Cf yield had like a -.99 coefficient to alpha. The whole thing lasted only a week or so and there was little market turmoil outside the quant world. Andy Lo wrote a good post mortem that you can google. It cites losses of 8.7% for a key fund" at RenTech
All this is to say that the above article quoted completely misunderstands what happened in the second week of August 2007. These were market neutral and stat arb funds using exchange traded equities and futures that had little to do with the mortgage market. This was my first major market crisis at work and at the time I worked at a quanty shop, so it is forever etched in my mind.
So, I question the knowledge of the writers of that article.
My 4Q2016 Access Fund Deck has 39B on firm overview page. I’m not accounting for something or there are some massive outflows. Either way, Medallion isn’t the only fund with good returns; solid shop IMO.
i agree that the leverage is probably insane but given that it employs some of the smartest people ever born and the types of people who generally put scientific advancement before money, i doubt the fund could run for that long as a fraud without a whistleblower. also, they wouldn’t be able to pay out ~30% per year for the past couple of years unless they made that. it is also unlikely that it is partial fraud if they’ve paid out several times the fund’s aum over the years.
All good points. I wonder how big of a team manages the fund though. If it’s a small team, then fraud is definitely plausible. The returns just seem too good to be true… and you know what they say about things that are too good to be true… I would love to see an independent audit on those numbers.
Thanks for these good clarifying insights. While I still approach some RenTech’s results with some skepticism, I often approach financial journalists with a similar (if not greater) sense of skepticism especially insofar as commenting on things that they don’t totally understand.
Would you be asking questions if your investment was producing returns like that year over year? I doubt it. That may change if the music stops and there aren’t enough chairs for everyone.
Yes, I think the finance industry can be particularly opaque because employees are not at liberty to discuss many things until much after the event itself. It makes you think about how poor political journalism can be when viewed by an expert analyst (Ian Bremmer comes to mind).
The interesting thing about the quant crisis is that if you had sufficient liquidity to not unwind positions on Tuesday or Wednesday then by Friday close you were basically back to even. Fortunately we had sufficient liquidity, but if didn’t we would have been screwed.