An interesting article in the WSJ today highlights some of the issues I have been telling people for some time: Program trading exhibits similar herd-like behavior of many other markets...and to make matters more complicated, they typically use large amounts of leverage.
Of course, there had to be other players benefiting from the other side of the trades (which may or may not be quantitiative), but the general trend to quant shops in the hedge fund industry may improve the perceived uncertainty with the presentation of elegant equations and data that supposedly quantifies "risk" that cause investors to become wildly overconfident. And when the false security of numbers fails to perform as promised, investors begin their redemptions.
The punch line from the article:
"The reliance on models can be especially problematic because many quant
hedge funds have very similar models. That means they are often doing
the same trades and buying the same shares. Moreover, because the
strategies are supposed to be market-neutral, with no net positive or
negative bent, the funds often borrow large sums so they can bet more
and achieve better returns when things go their way.
That massive borrowing adds to the pressure when markets reverse course
several times in the course of a single day, as the stock market has
done repeatedly in recent weeks, or when tried-and-true relationships
between different markets suddenly break down."