Given the recent "black swan" events in the market, quant funds that have relied on longer-term trading strategies have suffered (see Reuters article). As a result, many quants are now focusing on higher-frequency strategies that are executed quickly, both to get into and out of positions. No doubt that such an increase in programmed algorithmic trading is contributing to already elevated levels of market volatility. Ironically, many traditional quant funds operate more efficiently in stable market environments, causing such funds to suffer under the recent higher levels of volatility.

The change in trading duration is needed in part since many of the longer-term strategies are no longer valid given the changing market landscape, which due to company failures and shifting regulations, seems to be changing nearly everyday. Modelers using intelligent trading systems, especially supervised systems like neural networks that require extensive historical data in order to learn market patterns, are finding it a challenge to train their systems given the changing market dynamics and subsequent lack of relevant data. The tracking errors have also been significant enough to cause many funds to scale back their use of leverage, putting further pressure on quant funds that rely on borrowed money to juice returns.

While some quant funds could potentially go out of business given current losses, there is no doubt that many other quant traders are seeing this as an opportunity to create new algorithms not yet adopted by the larger quantitative trading community. I image the next great algorithms and trading strategies - which we will not hear about for a few years - are begin developed and deployed as we speak. If there is one thing many quants like more than money, it is a good challenge. The market has certainly provided the challenge, along with some unique opportunities.