“No beliefs, only processes”: How French hedge fund Quantology’s machine-based model is reaping rewards
“Our motto is: ‘no beliefs, only processes’,” says Julien Messias, portfolio manager and co-founder of French systematic hedge fund Quantology Capital Management. “We are agnostic as to where the market will go – it is impossible to forecast. So what we trust are our processes.”
Established in Paris in 2013 by Messias and founding partner and chairman Vincent Fourcaut, the firm runs a fully systematic long/short US-focused market neutral equity hedge fund – the Quantology Absolute Return Fund - which trades Nasdaq and NYSE-listed stocks long and short using quarterly earnings data, with a focus on behavioural finance indicators.
The strategy, which manages around EUR60 million in assets, has advanced some 5.4 per cent so far in 2020, with low volatility and no down months – a performance Messias describes as “consistent” and “smooth”, particularly in the context of the market upheaval brought about by the ongoing coronavirus crisis this year.
“We use mathematics and we use algorithms; we do quantitative investing in a systematic way in order to exploit the behavioural biases,” he explains, speaking to Hedgeweek on Friday from the firm’s Paris base. “The more views you have on the market, usually the less performance you make.”
Specifically, the machine-based system builds positions according to an assortment of stock signals generated from quarterly earnings reports from companies, using a proprietary model based on Post-Earnings Announcement Drift.
“My day-to-day job is to focus on our R&D, and our processes, in order to generate performance,” says Messias, who earlier traded equity derivatives at BNP Paribas and later at ING Financial, with a focus on interest rate exotic and index derivatives.
Among the positive performers for the fund this year have been selected long bets on mid-cap internet stocks, such as Liveperson and GoDaddy, whose strong Q2 earnings helped boost Quantology’s gains. Longer-term, the fund is up more than 9 per cent since inception, compared to its benchmark’s 2.5 per cent advance.
More recently, the strategy’s market-agnostic, process-based approach ably demonstrated its mettle when a spike in volatility in US technology stocks earlier this month sent the Nasdaq spiraling to its biggest slide since the March maelstrom, with the so-called FAANG names - Facebook, Amazon, Apple, Netflix and Google - suffering a particularly hefty tumble (Apple dipped 8 per cent at one point, while Facebook fell around 4 per cent).
As the Nasdaq 100 Notional Net Total Return Index dropped almost 12 per cent in the two weeks to 18 September, the Quantology Absolute Return Fund stayed flat during the same period.
“Our model handled the market volatility very well, and as of today we are slightly positive on the week,” adds Messias, who as a lecturer teaches Derivatives Products and Risk Management at Paris-Dauphine and Solvay School of Economics.
“That shows the resilience of our fund, and the real decorrelation of the strategy.”
As well as navigating recent market turbulence, the firm has also had to contend with the business and operational challenges thrown up by the Covid-19 pandemic. In recent years, French trade unions’ penchant for industrial action has meant the business has been well-equipped to operate remotely, with its teams working from home when strikes have prevented travel into the office.
“Our team is split into two sub-teams. One is dedicated to sales, one on the R&D and operational side,” he explains. He acknowledges that the sales effort has faced certain challenges as a result of the pandemic’s shake-up to the workplace.
“If you want to convince customers to invest in your fund you have to meet them physically. Just setting up a call or writing an email is not the same as meeting the prospective investor or client in person.
“But we have a very flexible structure, so we did not suffer in any way at all from the Covid situation in terms of our organisation.”