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Algo Trading Hedge Funds have struggled to adjust to the chaotic market

Some of the best-known computer-powered hedge funds have struggled to adjust to the chaotic markets rocked by the coronavirus, with Renaissance Technologies, Two Sigma and DE Shaw seeing some of their biggest funds hurt this month.

According to the article published in Financial Times:

So-called quantitative funds rely on high-powered computers, vast data sets and algorithms to systematically exploit patterns in securities prices. Their success has spawned a multitude of copycats and led many traditional investment groups to try to emulate their techniques. DE Shaw, Two Sigma, and Renaissance — considered the gold standard of quant funds — now manage close to $200bn combined.

But the ferocity of the recent market turmoil has inflicted some painful losses, forcing many quants to ratchet back their positions. One big investor in hedge funds described the numbers from his quant portfolio as a “disaster”, while some say the setbacks resemble a “quant quake” — a reference to a brief but traumatic period for the industry in August 2007.

Credit Suisse estimates that quant funds as a whole have nearly halved the size of their positions since the beginning of the month, and that the average quant fund has lost 14 per cent this year. “This rapid unwind is indicative of the magnitude of the broader shift in attitude towards the economic fallout from Covid-19,” the bank’s hedge fund desk said in a note to clients on Sunday.

“There are weeks when risk becomes difficult to manage,” said Mark Connors, global head of risk advisory on Credit Suisse’s prime services desk. “Most funds have had a tough period with both longs and shorts in this environment.”

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