Are quant strategies in trouble yet again ~ acb forex trading system
There were reports that quant strategies have been suffering again in January, given the market turmoil generated partly by the Societe Generale scandal. Mr. Matthew Rothman of Lehman Brothers pinned the blame on momentum strategies (Hat tip: 1440 Wall Street). I partly agree with that assessment, but the full picture is more nuanced.
As I have written in my previous post, December has been a disastrous month for value (or mean-reverting) strategies, based on both public commentaries and personal experience. Yet, as always, mean-reverting strategies bounced back in January and all the pain is gone. In fact, the Societe Generale scandal and the subsequent 1/22 Fed bailout has been a huge bonanza to mean-reversion traders, just like the August disaster had been. (Remember: mean-reversion traders profit from providing liquidity during market panic.) Meanwhile, though December has been a good month for momentum strategies, January has become increasingly inhospitable to them. But one should not be surprised at all. As I have explained before, momentum strategies generally tend to be more unstable and have lower Sharpe ratios than reversal strategies. Any wise quantitative portfolio managers would always allocate a lower proportion of capital to momentum strategies than to reversal strategies. Hence it is no excuse at all to say that a quant portfolio has been hurt by losses in momentum trading -- they are to be expected quite frequently!
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