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Why Dollar-Neutral Quant Strategies Fell During the 2020 Selloff

Article arXiv papers · Author: Zura Kakushadze
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Summary

This discussion explains why dollar-neutral quantitative strategies, including statistical arbitrage in equities, experienced substantial drawdowns during the COVID-19 market selloff. It outlines why such strategies can work in ordinary conditions, identifies the market regimes in which they tend to work best, and describes limitations that can cause them to break during extreme events.

An accompanying appendix uses backtests of several strategies to illustrate the main discussion and includes freely accessible source code. The supplied description does not specify the tested strategies, data, assumptions, or numerical results, so it does not support conclusions about how broadly the explanations apply or how any strategy performed beyond the stated drawdowns.

Key ideas

  • Dollar-neutral strategies can incur substantial losses during sharp market selloffs.
  • The discussion considers why these strategies work in ordinary markets and which regimes suit them best.
  • Extreme market events can expose limitations that cause strategies to break down.
  • An appendix uses backtests to illustrate the discussion.

Tags

EquitiesArbitrageBacktestingRisk management
Full text
# Quant Bust 2020


# Quant Bust 2020









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.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.