They were revered as the brightest minds in finance, the "quants" who could outwit Wall Street with their superfast computers.
But after blundering through the financial panic, losing big in 2008 and lagging badly in 2009, these 'quantitative investment managers' no longer look like geniuses, and investors have fallen out of love with them.
The combined assets of quantitative funds specialising in US stocks have plunged to $467 billion, from $1.2 trillion in 2007, a 61 per cent decline, according to eVestment Alliance, a research firm. That drop reflects both bad investments and withdrawals by clients.
The assets of a broader universe of quant hedge funds have dwindled by about $50 billion. One in four quant hedge funds has closed since 2007, said Lipper Tass.
"If you go back to early 2008, when Bear Stearns blew up, that's when a lot of quant managers got blown out of the water," said Neil Rue, managing director with Pension Consulting Alliance in Portland, Ore. "For many, that was the beginning of the end."
The setback is a stinging comedown for the wizards of high finance. For a generation, managing a quant fund — and making millions or even billions for yourself — seemed to be the running dream in every math and physics department. String theory experts, computer scientists and nuclear physicists came down from their ivory towers to pursue their fortunes on Wall Street.
They turned investment management on its head, even as their critics asserted they deepened market collapses like the panic of 2008.
The decline of quant fund assets runs against a powerful trend in finance. For a change, flesh-and-blood money managers are doing better than machines. Much of the money that is flowing out of quant funds is flowing into funds managed by human beings, not computers.
Quant funds are still struggling to explain what went wrong. Some blame personnel changes. Others complain that anxious clients withdrew so much money so quickly that the funds were forced to sell investments at a loss.
In an effort to woo back investors, some quants are tweaking their computer models. Others are reworking them altogether.
"What we're seeing is that not all quants are created equal," said Maggie Ralbo—vsky, managing director with Wilshire Associates, which gives investment advice to pension funds.
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