We’ve been hearing tales of woe across the board regarding stat arb performance lately, with May sounding especially bad. Mean reversion strategies suffered significantly during the month, and fears of crowding and liquidation events are floating around. Here’s a plot of the HFRX Equity Market Neutral index YTD, alongside a simple dollar neutral reversal strategy before costs:
It’s an ugly chart and roughly in line with the chatter. It’s too soon to know whether we’re in for another August 2007-like quant crisis, but even the hint of such an event provides all the motivation one should need to diversify one’s alpha sources.
Meanwhile we’re still seeing very solid performance from our alternative alpha models: the TRESS signal (financial bloggers sentiment) has a YTD Sharpe of 1.3, and the Digital Revenue Signal (online consumer demand) is showing a whopping 4.8 (with five months in a row of positive performance), and both models are showing much lower volatility than we’ve been seeing with mean reversion lately.