The Meltdown Of August 2007 Essay
The meltdown of August 2007 caused the strategies applied by hedge funds to become vulnerable and exposed to high risk. Quant investing strategies combines mathematical finance, econometrics and economic theory to investing. There are two foremost approaches which quant funds presents: high-frequency statistical arbitrage funds, and longer-term market neutral funds.
Statistical arbitrage is a vast short-term mean-reversion approach utilising a large number of securities, very short holding periods and extensive trading as well technological infrastructure. This quantitative strategy involving statistical methods is subject to model weaknesses in addition to security specific risk. Market neutral funds are complex products with longer time periods which function on economic models and lower frequency mathematical forecasting methods. This approach employs factors which are constructed on several investment styles and data assembled from balance sheet and macroeconomic fundamentals.
Both quant funds discussed utilise leverage and aim to take advantage of new information which is not incorporated in current prices. The attractiveness of these strategies increased sharply during the 2000s and particularly during the second half of 2003 and 2004.
During the summer of 2007 numerous quant fund approaches undertook adverse returns. According to some literature, the emergency liquidation of a fund that experienced…