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Crabel Capital CEO to discuss appeal of quant funds at Amsterdam Investor Forum

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Crabel Capital Management’s chief executive Michael Pomada will be discussing the appeal of quant funds at the Amsterdam Investor Forum on 8 March.

Pomada says that when investors think about quant funds they group them together and assume they all do much the same.
Whilst other managers such as Two Sigma pursue a similar non-trend following approach to trading short-term market fluctuations, each quant fund pursues an individual approach.
This enables them to generate non-correlated returns.
“Last year was interesting where we were able to offer a diversification benefit despite the Newedge Short Term Traders Index finishing down for the year. We made positive returns in a year when most other hedge fund strategies were down and investors were appreciative of that,” says Pomada.
Pomada will be sitting on the panel “Quants in 2017: 3, 2, 1. All engines running, liftoff?” at the Amsterdam Investor Forum, hosted by AMBO AMRO Clearing in Amsterdam on 8 March 2017.
Quant funds have become a source of renewed interest among institutional investors as they seek out strategies that are equipped to navigate whipsawing markets. As more of these funds come to market, Pomada says it makes investing that little bit harder.
Quantitative investing, particularly when it enjoys good periods of returns, tends to get crowded with respect to short-term futures trading – relative to longer-term trend following strategies – and this has made things more challenging, according to Pomada.
“When you look at some of our strategies which have been trading since 1992, you can see a steady degradation of returns without any work being done on them. This means that either the trades are becoming more crowded, the anomalies that the model is identifying are better known, or people are getting smarter and making fewer mistakes.
“We personally go through a process where we try to improve returns at all times. Our line internally is ‘Let’s be in a constant state of improvement’,” explains Pomada.
Quant funds might once again be flavour of the month with investors, but they are not immune to poor performance.
As Pomada recalls, when Crabel went through a tough period in 2008 and 2009 it coincided with the apparent rise of high frequency trading (HFT) strategies. These were new to investors, despite having existed for years previously, yet a common question Crabel Capital would get asked by investors was: “Are these HFT strategies eating in to your returns?”
“At the time, this was a legitimate question because it was hard to know,” says Pomada. “You have systems that try to make money – sometimes they do, sometimes they don’t, sometimes they break down and need fixing – and my answer any time I get asked this question is the following: ‘Yes, it gets a little bit harder to capture alpha with more people developing new quant strategies’.
“To be clear, we use machine learning techniques and our execution has to be nearly as fast as an HFT firm. In terms of an asset manager who trades money for external investors, we are easily one of the fastest in the world.
“We sit in a fairly unique position. Do quants and machine learning strategies impact the fundamental stock pickers and take down their alpha generation as well? Absolutely. If there is alpha to be made, computers are generally better at finding it.”
One of the paradoxes of quantitative trading is that despite taking the emotion out of investing, leveraging off of human mistakes to exploit market inefficiencies – which in theory makes markets more efficient – trading algorithms occasionally flock towards the same trading opportunities, creating potentially serious fat tail events like the 2010 Flash Crash.
“We also saw it more recently with the dramatic move in sterling following Brexit. It is a contradictory problem; at the same time as making markets more efficient they actually make them less efficient in some ways because of the anomalies that sometimes arise.
“In a perfect world, the markets would be efficient and computers wouldn’t gravitate to the same trades and humans wouldn’t make errors. The reality is, at Crabel we try to take advantage of both sides. We’re not involved in HFT so we’re not piling into trades like on the flash crash in May of 2010, which for us was actually a profitable day,” says Pomada.
He notes that in terms of market awareness, there has been a clear shift among investors. A decade ago, large institutional pension plans and SWFs didn’t really understand quant trading as much as they understood fundamental trading. Back then, Crabel’s investors were mostly FoHFs.
Fast forward to today, and pension funds are now much better at understanding the value of having a diversified portfolio that includes quantitative funds.
“It has put quant funds firmly back in the minds of these institutions. They are smarter and better at understanding the benefits of including quantitative strategies in their portfolios. It’s been great for us,” says Pomada.
Asked about the explosion of technological advancements and the massive volumes of data that fund managers can leverage and plug into their computer models, Pomada responds: “It is benefiting us, unequivocally.
“The first thing my advanced statistics professor said on day one of class was, ‘The best data wins’. That applies to the world at large, not just the hedge fund space. I think when it comes to a data-driven world, we are in the first inning. It’s just starting. The granularity, the cleanliness and the uniqueness of data gets better every year, which helps to give us a bit of edge that we wouldn’t have had in the past,” concludes Pomada.  

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