The dog days of summer have arrived for quants.
Systematic traders who tie their fortunes to the ebbs and flows of stock markets are experiencing some of their worst returns in eight years, according to one Wall Street estimate.
Factor investing -- which slices and dices equities based on traits like profitability and price volatility -- has buckled while the broader market has stayed afloat. For example, AQR Capital Management LLC’s $1.9 billion mutual fund, one of the largest in the sector, last month nursed its steepest loss since inception.
It’s all adding insult to injury for quants struggling to make money this year as equity volatility awakens and economic angst builds.
One reason: factors that tend to move in the opposite direction failed to offset each other, dropping in unison last month. A market-neutral version of value -- which bets on companies priced cheaply while offsetting the broader market -- rounded off its worst quarter since 2011. Meanwhile, momentum, which bets on the highest fliers like tech stocks, saw its biggest monthly drawdown in more than two years.
“This particular period was driven by tough performance for value,” said Jacques Friedman, principal at AQR. “The complementary themes like momentum and quality weren’t up enough to mitigate the underperformance of value.”
The AQR Equity Market Neutral fund fell 4.8 percent in June, the worst monthly performance since its 2014 launch, according to data compiled by Bloomberg. That brings its 2018 losses to 8.7 percent, compared to a 5.8 percent total return for the Russell 1000 Index.
The Greenwich, Connecticut-based firm is in good company. Only 17 percent of large-cap active quant mutual funds outperformed the Russell 1000 index in June, the worst monthly showing in more than eight years, according to Bank of America Corp. Vanguard Group’s $1.6 billion market-neutral mutual fund fell 1.8 percent, the worst in more than a year. A spokesman for Vanguard declined to comment on performance.
Trade and supply concerns that spurred oil-price volatility may have crimped quant returns, said Mark Connors, the head of risk advisory at Credit Suisse Group AG.
“When crude or rates move unexpectedly, it often results in unexpected price patterns for other factors including momentum, value and other benchmark factors,” he said. “It also impacts the bespoke factors that quant funds create for differentiated returns.”