Hedge funds trading technology companies endured a bumpy start to 2022, with bets on a slew of blue-chip stocks souring as investors took flight amid fears of rising inflation and interest rates coupled with concerns over US economic growth.
Hedge funds trading technology companies endured a bumpy start to 2022, with bets on a slew of blue-chip stocks souring as investors took flight amid fears of rising inflation and interest rates coupled with concerns over US economic growth.
Technology-focused equity hedge funds, which invest long and short in a wide array of software, tech, information and telecoms names, earlier had finished last year up around 5 per cent – lagging the broader hedge fund industry, which averaged an annual double-digit return of more than 10 per cent in 2021, according to Hedge Fund Research data.
Tech stocks had soared during in the initial stages of the Covid-19 pandemic, helping push tech-focused hedge funds to bumper gains of almost 30 per cent in 2020. But as the likes of Microsoft, Peloton, Meta and Zoom – which had all thrived as a result of lockdowns and home-working – continue to trend downwards, technology hedge funds have started 2022 in negative territory, HFR’s analysis shows.
Elsewhere in the tech field, hedge fund managers of all shapes and sizes continue to keep close tabs on the alpha-generating potential of the rapidly-expanding, but perennially volatile, constellation of cryptocurrencies, blockchains, and other assorted digital assets.
Quantology Capital Management, which runs a systematic long/short market neutral equity strategy trading tech-heavy Nasdaq and NYSE-listed stocks, was among the positive movers earlier this year, its February gains comfortably outflanking the Nasdaq, traditionally seen as a barometer for the US technology sector.
The Paris-based quant firm – whose strategies use market-agnostic, algorithm-based processes to generate returns from behavioural finance indicators, share price trends, and other stock signals within companies’ quarterly earnings data – continues to expand its focus, tapping into the burgeoning opportunities in other tech spheres, such as digital assets and the metaverse.
“At Quantology Capital, we do think that the best answer is to think out of the box, and to explore new topics, new themes and new techniques; focusing not on the market itself, but on the market practitioners,” says Julien Messias, Quantology’s co-founder and head of R&D, of the evolving tech investment landscape.
“Our aim is not to build new tools to better understand the markets, but to build new tools that will enable us to better understand what the other practitioners think they think about the markets.”
Traps
He adds: “As the investment markets become more and more complex, its speed and money velocity follow the same path, meaning that there is no substantial edge versus a traditional efficient market. The latter adapts very quickly to innovation, and it would be false to imagine that only technology is able to improve the results of the hedge funds industry.”
Meanwhile, for other computer-based strategy types – such as systematic macro and managed futures – technology companies are just one element of the increasingly fractured investment landscape that looks particularly fraught with difficulty.
“Inflation, rising yields, soaring commodity markets, and negative sentiment on seemingly untouchable tech stocks – you need to look back 20, 30, or in some cases even 40 years to find conditions that are similar,” says Razvan Remsing, director of investment solutions at Aspect Capital.
“There are many traps that people may fall into if they design models that are too short-termist in nature, or that utilise datasets that are too new. What we are observing at the moment is that some of our longest-standing and battle-hardened systems are the ones that are able to handle this current environment without skipping a beat.”
Remsing adds: “It’s not the sudden stop that we saw for Covid. The response to Covid was completely unseen before in terms of everyone in the world stopping what they were doing and going home. That was a first. What we are experiencing now is more ‘old-school’ geopolitical risk, return of inflation, risk of stagflation and a refactoring of stock-bond market correlations,” he says of the looming investment backdrop.
“It’s going to be interesting to see how this period plays out, and what we will learn about where the alt-data sets actually deliver value in a big macro shock environment like this.”
Read the full A Tech Revolution: How machines are reshaping hedge fund investment Insight Report here.
