WSJ Points To "Long-Short" Quants' Deplorable Performance As Sign Of Market Correction Warning

A topic long covered on Zero Hedge is finally starting to grab some MSM headlines: core long-short  quants have missed the entire rally. The WSJ highlights Rentec's REIF, a rather generic 175/75 L/S fund, as a harbinger of a potential major market correction to come. Indeed, if one were to look at RIEF's AUM over the past three years, one would wonder how it is that the fund, originally slated to have up to $100 billion in investable capital can still even be around:

L/S unwinds, redemptions and deleveraging have been by far the primary factor for forced moves higher in high beta stocks. Alas, you won't hear the mainstream media discussing this, as it really has no relevance to the green shoot rally.

As for Medallion, RIEF's always outperforming bigger brother, performance numbers are sketchy YTD, however one can be sure that the Ph.D.'s and Nobel recipients in East Setauket can not be too happy about the Flash ban. It will be interesting to see just how much better than RIEF Medallion does this year, and whether, with flagrant "Information asymmetries" out of the picture, Medallion's fate may be sealed.

Regardless, what is the only bright side in the otherwise dreary quant landscape? One would answer "Market Neutral", joystick yielding, liquidity providers, yet even they, according to the HSKAX and HFRXEMN, have not been doing all that hot (next story hint, WSJ). So who really is making money on liquidity provisioning? Perhaps an answer may be provided by the NYSE's SLP program and its benevolent monopolist: Goldman Sachs.

From the WSJ:

The bear market is over? Tell the quants.

The stock surge since March has done little to bolster the fortunes of a group of "quantitative" hedge funds, which make investments based on mathematical formulas.


One way these investors like to make money is by betting on high-quality stocks while at the same time wagering against the fortunes of stocks that seem overpriced. For much of the year, that strategy hasn't worked out, because momentum stocks like American International Group and MGM Mirage, some without great earnings prospects or with poor balance sheets, have led the charge higher.


Overall performance figures for quant traders, while disappointing, haven't been horrible. Quantitative "directional" funds rose 9.6% through August, well off the 14% gain of the average hedge fund.


But some of the big funds are doing much worse. The MAN AHL Diversified fund was down more than 14% through August, according to investors, while Renaissance Technologies' RIEF fund dropped nearly 12%. Two funds run by Winton Capital Management were down about 8%.


There are indications that the losses have gotten worse in recent days for some quants. Shares with the highest levels of short interest have been among the best performers in the past few weeks, according to Barclays Capital, while those with improving growth prospects are actually doing worse than the market. "Quality" stocks are on one of their worst streaks since 1950, Barclays said, causing problems for many quants.


Rather than a sign that their whiz-bang computers should be chucked, quants' problems could be an early warning that the stock gusher is due a break.

Perhaps the WSJ would be comparably surprised if it found out that of RIEF's $5.3 billion in total assets, about a quarter are employee capital. One wonders if in order to be admitted in the presumably better equipped to handle "informational asymmetries" Medallion fund, Rentec's employees have to suffer through a forced RIEF purgatory. Although as the SEC investigation at Rentec hopefully draws to a close, they won't be forced to suffer such an indignity for much longer.

h/t Joel