On this page we present various interesting research articles with focus on equity market neutral or statistical arbitrage strategies. Given the focus of the site, most of these will have some bearing on how to evaluate hedge fund strategies.
Performance
Quant Bust 2020
Zura Kakushadze: We explain in a nontechnical fashion why dollar-neutral quant trading strategies, such as equities Statistical Arbitrage, suffered substantial losses (drawdowns) during the COVID-19 market selloff. We discuss: (i) why these strategies work during “normal” times; (ii) the market regimes when they work best; and (iii) their limitations and the reasons for why they “break” during extreme market events. An accompanying appendix (with a link to freely accessible source code) includes backtests for various strategies, which put flesh on and illustrate the discussion in the main text. Download the paper here: https://ssrn.com/abstract=3570280
Comment: An intuitive non-technical narrative of why stat arbitrage suffered one of the worst months in April 2020. The author is also somewhat sceptical about that ML/AI strategies are the solution and way to stellar returns.