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The media seems to have an endless fascination with quant funds. Here is the latest article from the Economist magazine, summarizing the postmortem published by several researchers. (Hat tip, once again, to reader Mr. J. Rigg.)

The key points are as follows:

1) Quant funds are now becoming the primary market makers in many securities, which normally would provide liquidity and decrease volatility.

2) Unlike ordinary market makers, however, quant funds are highly leveraged.

3) Because of the high leverage, in the face of large losses these market-making quant funds are forced to liquidate their assets instead of buying them, thus behaving in a way opposite to ordinary market makers just when the need for liquidity is direst.

4) Thus quant funds are actually contributing to instability of the market despite their apparent market-making function.

Fortunately, when all else has gone wrong, there is alway Mr. Bernanke to count on ...

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