Founder, CEO and CIO Basil Qunibi explains why alpha capture, market concentration and the AI investment cycle are increasing the value of differentiated stock-picking talent.
The buzzword in the hedge fund universe over the past several weeks has been alpha capture. The investment strategy, originally pioneered by Marshall Wace and adopted by managers including David Stemmerman, is now under strong consideration by some of the world’s largest hedge funds.
Alpha capture being adopted at an institutional level demonstrates a twofold dynamic within the industry: the breadth of the largest hedge funds and the risk of correlation mean the value placed on new areas of capital deployment has never been greater. Moreover, the gap between these funds and the rest of the industry is only increasing, as they have the capacity to attract managers’ intellectual property away from their current platforms, potentially accelerating industry consolidation and placing pressure on pod-based firms to differentiate.
However, one firm that holds strong conviction in its ability to retain managers within a multi-manager structure is Atom Investors. Spearheaded by Founder, CEO and CIO Basil Qunibi, Atom allocates capital to approximately 45 highly specialised portfolio managers globally through SMAs. This includes portfolio managers focused on Japan, small- and mid-cap equities, healthcare and natural resources.
Speaking at the firm’s new London office, Qunibi explains the appeal of operating within this framework: “These managers are not generally interested in working for someone else. They are also unlikely to participate in an alpha-capture programme because their ideas are worth far more than whatever payment such programmes offer.”
Qunibi describes Atom as a different model from the traditional pod shop, rather than a rejection of it. Traditional platforms often say, “Come work for me, I’ll give you capital, I’ll pay you a share of profits, but you’ll run the portfolio the way I want.” By contrast, he envisages a fund more akin to Berkshire Hathaway, where they “find exceptional entrepreneurs who run their own firms and strategies.”
Finding people who fit within this framework can be a challenge, but Qunibi boils it down to distinguishing between skill and luck; identifying managers who show a consistent ability to perform in different market regimes. “In a market heavily dominated by a select few industries, we try to understand the individual sources of return—market exposure management, sector or area timing, and position sizing.” For Qunibi, the key point comes back to “generating alpha intrinsically through stock selection and portfolio management, rather than extrinsically through market or sector timing.”
A common problem that can occur within these structures is style drift and diminishing, identifiable returns. But Qunibi believes this can be managed through understanding historical and real-time data and often has identifiable features—a change in investment universe, strategy style or time horizon. More challenging is navigating regime shifts, the turnover of which has been far more apparent in recent years. Furthermore, these changes are not defined by a single feature but by a multitude of often diverging factors, including sentiment, positioning and speculation.
Qunibi believes the current environment is in a state of flux.“We are experiencing regime drift right now. Based on Atom’s internal analysis, alpha generation over the last year has been extremely difficult. The equity long/short industry is generating some of the lowest levels of alpha we have observed since we began measuring it.” Qunibi adds: “When we look at factors such as beta, momentum and residual volatility, the combined impact is at levels we have only seen twice before—during COVID and during the late-1990s technology bubble.”
The comparison to once-in-a-generation market events is not an off-the-cuff remark from Qunibi, who is “extremely concerned” about the current state of markets.“What we are seeing is one of the more extreme factor and concentration environments we have observed. Several measures of retail activity, institutional leverage and market concentration are at extreme levels relative to history.” Recent equity market movements have echoed Qunibi’s views. Large fluctuations in the KOSPI and Nikkei indices demonstrate elevated levels of concentration, where any price shift in SK Hynix or Tokyo Electron can have significant ripple effects across the market. Technology stocks worldwide recently recorded their weakest monthly performance in several months. Analysis from the Financial Times suggested that, for some investors, the AI narrative may have peaked, choosing to cut positions and take profits, and that any downturn could evolve into a more prolonged decline.
Our recent discussion with Bainbridge PM Chawkat Nammour highlighted a fundamental dilemma within the AI trade: memory supply is vastly outweighed by memory demand. Micron’s recent earnings underscored this trend, with profits rising fourfold year over year, while Apple passed higher memory costs on to consumers by increasing the prices of several products. Qunibi expands on that idea by questioning the longevity of demand, given that hyperscaler purchasing power is not infinite.“Who is ultimately going to pay for all of this? Google, Meta and Microsoft are buying the bulk of chips for their data centres, but their free cash flow is increasingly under pressure.”
Bloomberg analysis outlined that hyperscalers have committed close to $700 billion in future lease commitments for the continued rollout of data centre and cloud infrastructure. The AI capex trade remains supported by the assumption that demand for AI will continue to grow indefinitely and, as Qunibi points out, that has some of the characteristics of a bubble. As Rich Privorotsky, strategist at Goldman Sachs’ Global Banking & Markets division, wrote: “The rubber band can only stretch so far. What happens if they realise value for shareholders can be achieved far better by reducing allocations to AI?”
Despite these potential warning signs, periods of volatility can create compelling opportunities for specialised managers under the Atom Investors umbrella.“There’s a lot of uncertainty and that has ripple effects across all markets and sectors. The years following the dot-com bubble were some of the best periods ever for long/short investing. Overvalued companies collapsed, while high-quality businesses trading at attractive valuations performed exceptionally well.”
