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Quant hedge funds increasingly popular with investors

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Research from SigTech’s 2021 annual Hedge Fund Research Report saw 80 per cent of hedge fund managers expecting institutional investors to increase their allocation to quant strategies over the following year, and 86 per cent expecting quant hedge fund strategies to increase allocations over the following five years.

Research from SigTech’s 2021 annual Hedge Fund Research Report saw 80 per cent of hedge fund managers expecting institutional investors to increase their allocation to quant strategies over the following year, and 86 per cent expecting quant hedge fund strategies to increase allocations over the following five years.

Industry data indicates one in five hedge funds now apply quant investment processes. The latest research from SigTech shows that 22 per cent of the world’s hedge funds use purely quantitative investment processes, with roughly 2 per cent saying that they also use AI.

Mercer principal John Jackson believes the “opportunity is ripe” for hedge funds, including quants, observing how quant hedge funds typically perform well in “higher levels of sustained volatility” and when markets are trending or consistent.

The Russia-Ukraine war leaves quant hedge funds primed for strong performance in the coming months.

“Broadly, clients are looking for more diversification in their portfolio, which will probably lead them to hedge funds and within hedge funds, systematic approaches. So, some clients will be in the quant space because of increased diversification,” says Jackson.

But research shows that diversification isn’t the only reason for increased allocation to quant strategies.

SigTech’s data also shows that 48 per cent of managers expected investors to increase their allocation slightly, and 18 per cent expected this increase to be “dramatic”.

Motivations behind this include increased transparency, as well as good returns.

Quant hedge funds hit a bump at the turn of 2020 when the pandemic struck, but have since recovered and grown steadily in popularity.

“Initially, I think quant hedge funds were caught on the wrong side of Covid-19. They were positioned in a certain way, for certain trends, and then the pandemic threw a wrench into those environments.

“When markets shift dramatically, volatility spikes almost instantaneously – quant funds do less well in whipsaw markets,” says Jackson.

“In periods of prolonged market stress, as we have now, is where quant strategies really prove their mettle. They were also already well-positioned in due to an overweight in commodities where we’ve seen a tailwind which has followed from the Russia-Ukraine crisis,” he adds.

Cyclical

Recent research from Bloomberg found that the momentum quant trade is having its best year in almost 20 years for this exact reason. But while quant hedge funds are currently proving popular and successful, Meketa research consultants err on the side of caution.

“It’s a very cyclical business. Regarding trend-following strategies, the latest is that performance in this space has been consistently good for the past three years or so; however, that is only one type of systematic strategy, which in and of itself can be implemented in many ways – never mind the dispersion across various types of systematic strategies. All quant is not created equal, of course,” warns Meketa SVP Jason Josephiac.

“I think investors should be open and nimble to what their environment can hold in the future,” he adds.

However, that’s not to say that there aren’t other possibilities for quant funds.

“We tend not to have any bias where possible. We look for quantitative or systematic strategies which are still rooted in some sort of fundamental or economic rationale. There are ways for discretionary strategies to implement parts of their processes in a systematic manner to gain efficiencies and guard against behavioural biases,” says Josephiac.

In terms of machine learning and AI, Jackson believes that we’re not quite there yet.

“There’s been a lot of evolution, and there’s no doubt that we’re finding more machine learning and AI approaches within that universe, but I think the foundations of pure trend following still exist, and frankly that’s what is delivering the best returns in this current environment,” he says.

So there’s still a long way before quant strategies become the best investment option.

“The perception of quantitative investment has always been twofold – ‘Einstein vs Frankenstein’ so to say. On the one hand, some see science as able to unveil some kind of “magic” hidden relationships which might provide a definitive edge for investing,” says Metori Capital Management CEO and co-CIO Nicolas Guassel.

“On the other hand, scientific people might also be perceived as stubborn individuals lacking common sense and not able to adapt to paradigm shifts. This duality is not recent, and the enthusiasm of investors seems to wax and wane with yearly performances.”


Read the full A Tech Revolution: How machines are reshaping hedge fund investment Insight Report here.

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