Wall Street and the Family Feud

From the Web site, the worst Family Feud Answers:

Question: Name the worst kind of shoe to run a marathon in.
#1 Answer: High heels
Worst Answer: Scuba flippers
Louie Anderson’s Response: If it’s up there… I’ll be surprised.

There’s something fascinating about the game show the Family Feud. You don’t have to give the best answer, or the funniest answer. You don’t even need to give a correct answer. All you need to do is give the answer everyone else gives. The show rewards people for being exactly like the largest amount of other people. Anything exceptional is not only discouraged, it’s actively punished.
I couldn’t help but think of the show as I read this WSJ article on why so many quant funds are having trouble:

A number of quant funds, which use statistical models to find winning trading strategies, reported heavy losses this month. In many cases, the managers pointed their fingers at other quantitative hedge funds, essentially saying they all owned many of the same stocks and their models told them all to sell at the same time, driving down the share prices, hurting everyone in the process.
In a letter to investors, Jim Simons of the hedge fund Renaissance Technologies wrote the quantitative funds behind the selling “undoubtedly share some signals in common with our own, and the result has been losses.” It didn’t help that quant funds are among the fastest expanding categories of hedge funds.

In other words, a lot of folks are running down Wall Street in scuba slippers.

Filings with the Securities and Exchange Commission show that as of the end of June, quantitative hedge funds often shared large positions in the same stocks. Renaissance held 1.1% of the shares outstanding of NVR Inc., a Virginia construction and home-building company. AQR Capital Management, another quant fund, held 0.9% of the company’s shares and quant fund Numeric Investors had a 1.6% stake.
NVR stock, which closed yesterday at $571 a share, trades less than most companies of its size. The shares have bounced higher since the selloff, but they are off 8.4% over the past month.
The overlap in quant funds’ positions wasn’t limited to NVR. Satya Pradhuman, director of research at Cirrus Research, which analyzes small and midsize stocks, found 148 other companies with market capitalizations between $2 billion and $10 billion where large quant funds owned 5% or more of the shares outstanding.
As a whole, those companies’ shares underperformed the shares of other midcap stocks during the selloff. Mr. Pradhuman found 473 small-cap stocks, with market capitalizations of $250 million to $2 billion, where the quant funds owned 5% or more of the shares outstanding. These stocks also performed worse than other similar stocks.
The midcap companies where quant funds held big stakes included packaging company Pactiv Corp., toy maker Hasbro Inc. and managed care provider WellCare Health Plans Inc. Small caps included printer Deluxe Corp., consumer-products company Russ Berrie & Co. and health-care equipment maker Zoll Medical Corp.

The Life of Brian:
Brian: Please, please, please listen! I’ve got one or two things to say.
The Crowd: Tell us! Tell us both of them!
Brian: Look, you’ve got it all wrong! You don’t NEED to follow ME, You don’t NEED to follow ANYBODY! You’ve got to think for your selves! You’re ALL individuals!
The Crowd: Yes! We’re all individuals!
Brian: You’re all different!
The Crowd: Yes, we ARE all different!
Man in crowd: I’m not…

Posted by Eddy Elfenbein on August 24th, 2007 at 10:05 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.