Hedge funds at risk as black box strategies unravel

Barclays is among the global powerhouses caught up in a maelstrom affecting a normally unremarkable corner of the financial universe, a storm that threatens to wipe out billions of dollars of value and could even sink a number of hedge funds.

Rumours swirled that Goldman Sachs and Barclays were among those liquidating positions amid unprecedented osses for funds that use sophisticated computer programmes to trade in the financial markets. These funds, called "quant" or "stat-arb" funds, use programmes designed using historical statistical data, and make millions of tiny trades, none of which are meant to affect the market and none of which involve big bets on the direction of particular assets. They are meant to be among the least risky of all the strategies used by hedge funds and other traders.

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Because stat-arb positions are designed as "market neutral", the liquidations of the past few days cause barely a ripple in stock market indices or the prices of bonds and commodities. It has, therefore, been a silent implosion, but it could be one of the big early disasters from the global credit crunch.

A spokesman for Barclays Global Investors, one of the top five quant fund managers, said the turmoil appeared to have been triggered by deleveraging by some of the big stat-arb players. "At the moment we are maintaining our risk levels and we feel that our portfolios are positioned appropriately." He declined to comment on whether Barclays has been liquidating positions or has suffered significant losses.

Some estimates suggest stat-arb funds could have lost 10 per cent of their value since the start of August, but firm figures are impossible to calculate in real time and the scale of the damage may only become clear after the end of the month, when funds report performance figures.

Most of the funds are highly leveraged, borrowing money to beef up what would otherwise be meagre returns.

Two Goldman Sachs hedge funds have been among those liquidating positions. The Global Alpha fund, its main in-house operation, has $9bn under management and its aggressive move to reduce its positions prompted rumours that it was shutting down entirely. The stories are "categorically untrue", the company said.

Goldman's North American Equity Opportunities fund, which had almost $800m under management earlier this year, has also fallen sharply in value and has been liquidating some of its positions too. Because many of the quant funds in turmoil have similar positions to each other, unwinding them only exacerbates the losses, leading to a downward spiral that still appears to be accelerating.