Dynamicmoats

Ex founding quant researcher and sub-PM here at a 1B+ AUM stats arb shop. Blaming the pod structure, momentum and incentive structure is at best missing the point and at worse shows that these people don't understand the fundamentals of a pod shop at all. The underlying cause is that an increase in cost and alpha decay (in returns) for many systematic managers have essentially forced many of them, especially the pod shops to increase the leverage they use to keep up returns. The broad increase in leverage across the industry makes a cascade in forced de-leveraging more likely. i.e When pod/fund X liquidates their portfolio, other pods/teams with similar exposure gets hit, and there's a good chance they get hit badly enough they get forced to de-leverage as well. The higher leverage reduces the drawdown threshold for each player and this cascade. Momentum strategies/factors are a natural trigger for this (but just a trigger) because they 1) tend to produce good returns, 2) work well (relatively) across markets and regimes, and 3) have terrible momentum crashes (due to crowding). I am constantly surprised by how little general knowledge the professionals in the fund management industry actually have about their industry.