Ten years ago, an abrupt meltdown in quantitative equity funds worldwide shook the burgeoning industry, spurring an exodus of investors. Goldman Sachs Group Inc. was among the worst hit, shedding three-quarters of its $165 billion in quant investments by 2012.
Gary Chropuvka, one of two partners leading the Quantitative Investment Strategies team at Goldman in New York, sweated those hot August days in 2007 that he says he’ll never forget. Rather than losing faith in quant investing, the group began to rebuild the strategies with less leverage and more diversity.
A decade later, the quant unit has clawed itself back to respectability. It manages about $110 billion in big-data mutual funds, smart-beta pools and other products -- all driven by factors such as consumer sentiment from social media. But a humbled Chropuvka now faces more robust competition, with almost every asset manager chasing quant money, betting on similar factors and shaving fees on exchange-traded funds to near-zero.
“We view this as a turnaround,” Chropuvka, 45, said in an interview at the bank’s New York headquarters. “We rolled up our sleeves and rebuilt the quant business based on the lessons we learned.”
During the week of Aug. 6, 2007, as cracks in the subprime mortgage market were just beginning to show, a number of long-short quant managers were suddenly hit with big losses. MIT professor Andrew Lo and a colleague wrote that the meltdown may have been triggered by a rapid unwinding of one or more large quantitative portfolios, possibly the result of margin calls or risk reduction. That led to the “fire sale liquidation of similar portfolios that happened to be quantitatively constructed,” they said in the 2007 paper.
At Goldman, ground zero for the implosion was a hedge fund called Global Equity Opportunities, which lost 23 percent that month. The firm in a report blamed the losses on the use of leverage in the fund and too many copycat managers making the same trades.
“Longer term successful quant managers will have to rely more on unique factors,” Goldman wrote.
Aims for Consistency
Today the QIS unit uses leverage in only some offerings and monitors markets for signs that certain trades are getting too crowded. The group strives for “persistent and consistent returns,” said Chropuvka, and no longer reaches too far for alpha, or benchmark-beating returns.
Smart-beta is the biggest piece of Goldman’s quant business, with about $77 billion in investments that track indexes based on factors such as low valuation and momentum. The unit has several billion dollars in smart-beta ETFs that were among the most successful launches of the past few years, said Eric Balchunas, an ETF analyst for Bloomberg Intelligence.