Software defects in quantitative investment funds

There was an interesting article in the New York Times over the weekend about software defects in quant funds. Quantitative funds (also know as Black Box funds) are investment funds in which investment decisions are determined by elaborate software algorithms.

Over the last 10 years investors have put vast sums of money with quant funds who have in turn spend vast sums on software. Investopedia has a good summary of quantitative funds which contains this interesting sentence:

The problem is that humans have to program those computers, and even computers can make mistakes when they are programmed incorrectly.

And, the NY Times article discusses an instance at AXA Rosenberg where this has occurred.

Some clients have been told more about the coding error. It was an “inadvertent mistake” entered into one of AXA Rosenberg’s main “risk models” by a computer programmer in April 2007, according to information provided to the Vanguard Group.

Although it’s difficult to tell if any investor funds were lost, the impact to AXA Rosenbergs reputation has been substantial with some large clients voting with their pocketbook. And the impact on AXA Rosenbergs assets under management has been substantial. Thanks to the NY Times article we know:

AXA Rosenberg, based in Orinda, Calif., had $41 billion in assets under management on May 31 — down from more than $62 billion in March, according to its Web site.


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