Motley Fool featured an article titled “Beat the Eggheads at Goldman Sachs,” which shed some light on how the quantitative approach to investing works. It’s entertaining reading especially once you realize that top pros in the business were getting slaughtered in August.
Yes, August was a difficult month with the markets pulling back, but the main reason things went so bad for the quant folks is the use of extreme leverage to enhance returns/losses. Sure, you may have used enhanced ETFs (up to 200%) yourself, but I am willing to bet that you only had a portion of your portfolio exposed and that you watched your position very carefully by having an exit point in place.
As the article states, some of the “quants” used 6 times leverage on 100% of the portfolio, apparently with no stop losses, so even small market fluctuations had a huge impact on gains and losses alike. If you want to find out how not to invest, this article is for you.