Quant Fund Performance Stumbles But Investors Plow Ahead
Quantitative hedge funds are fighting a spate of poor performance and efforts from fundamental shops to use more quant-like investing approaches to win business, but so far investor interest remains high.
Hedge Fund Research’s HFRI quant index, which includes commodity trading advisors (CTAs), was up 0.55% year to date compared to the average equity hedge fund returning 9.6%, according to third quarter figures.
But for many quant funds, these figures don’t paint an accurate picture of recent performance, says Michelle Knudsen, a senior principal who manages U.S. research for absolute return strategies at Partners Capital Investment Group, an outsourced investment office that oversees more than $18 billion.
“When you look at quant land, the picture at an aggregate level is not nearly as compelling this year, but I think that number masks the dispersions we have seen in the space,” she says. “We’ve seen a lot more funds up double digits… but those are counterbalanced by a lot of funds that have really struggled this year that are flat or down single digits.”
Meanwhile, many traditional, discretionary equity long/short managers have benefited from some of the reversals from last year, she says, driving up the aggregate performance of the broader equity hedge fund universe.
Despite improving returns in the hedge fund space overall, this year has seen some big-name closures including Eric Mindich’s Eton Park Capital Management and Whitney Tilson’s Kase Capital Management, as reported. Now a quant fund is joining the list of closures: Acrospire Investment Management, a firm that uses machine learning, told investors at the end of September it was shuttering, Bloomberg reports.
Poor performance in the CTA space has also dragged down overall performance for the quant sector, says Mark Doherty, managing principal at PivotalPath, an investment consultancy. But the returns haven’t stopped client interest and questions around the broader quantitative landscape, he says, including how quant funds can use machine learning and broader data sets to generate alpha.
Investors are showing particular interest in newer quant funds given the scarcity of capacity in some of the established, older quant funds, Knudsen says. “There are a lot of options, but not a lot of high-quality options,” she says, noting that investors need to look for how smaller shops will compete against the giants by examining their data edge, technology, portfolio construction, and business viability. “Who are the people involved? What’s their training? What’s their DNA? Where have they come from?”
Some smaller quant funds also can offer fee breaks that industry behemoths won’t, which can help sweeten the deal, says Chris Cutler, president of Manager Analysis Services.
“There are some smaller quant funds that are very good,” he says. “Institutional investors just need to look harder and find them.”
However, newer quant funds can also raise operational due diligence questions, says Chris Addy, president and CEO of Castle Hall Alternatives, an operational due diligence specialist.
“Generally they may have a short operating history, which gives rise to business risk,” he says, while quant strategies also should trigger cybersecurity concerns. Otherwise, quant funds are not “unduly risky” compared to other strategies, he adds.
Quant firms are also facing competition from data-savvy traditional hedge funds to win business.
Even as the quant market is evolving, some fundamental hedge funds are trying to become more like their quant peers by incorporating more data into their processes and hiring data scientists, says Anthony Keizner, a partner at Odyssey Search Partners, an executive search firm with experience sourcing fundamental investment and data science talent. Many firms are looking to bring technical capabilities in house to “extract unique insights,” as data becomes more available, technology becomes cheaper, and more third-party providers sprout in the space, he says.
“There’s been a huge increase, particularly in the last 12 to 18 months, of fundamental firms trying to incorporate data into their process,” he adds. “People are trying to take the best of both worlds.”
But one edge quant funds have is that investors are more willing to tolerate some down months as institutional investors continue to look for hedge fund investments to provide diversification, Cutler says.
“If everything is going up, but your quant isn’t, you can deal with that a lot better than if everything is going down and your quant is also going down,” he says.