Quant hedge funds post historic returns in ugly year for Wall Street

THE math wizards of Wall Street are notching dream returns in this nightmare year for global markets. 

Famous quant firms like AQR Capital Management, Man Group and Aspect Capital are riding high as inflation-fuelled turmoil thrashes many of their human counterparts in the stock and bond world.

Macro-driven volatility is powering one-way price trends, while creating new winners and losers as well as widening the performance gap between companies and assets – perfect conditions for this rules-based cohort.

After all, quants are hedge funds which rely on statistical techniques rather than human judgement to make investment decisions and carry out trades. The label encompasses everything from factor funds trading on rules like how cheap a security looks, to black-box investing styles that deploy artificial intelligence and alternative data.

AQR’s Absolute Return Strategy surged 40.9 per cent between the start of the year and November, and is set for its best year to date, said a person familiar with the matter. Man’s US$11.6 billion AHL Alpha was up 10.7 per cent this year until November, and Aspect’s Diversified fund jumped 37.9 per cent in the period ended Dec 7.

Meanwhile, there is a benchmark for trend followers on track for its best year, based on data that goes back to 2000, and a typical factor portfolio headed for its largest annual gain since at least 2008.

In other words, the situation now is a world away from the low-volatility bull market that nearly caused an existential crisis for computer-powered portfolios. 

Leda Braga, founder of US$16 billion money manager Systematica Investments, said: “There are some overarching macro themes that are alive and kicking at the moment – inflation, decarbonisation, disruption of the supply chain, the war in Ukraine. The next 10 years are going to be very different from the last 20.”

Systematica’s trend-following Alternative Markets fund has risen 16.5 per cent, while its BlueTrend strategy has gained about 30 per cent.

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It is hard to generalise when it comes to quants, since the label covers a wide range. But not every fund has thrived in 2022, although the end of near-zero rates is proving beneficial to many systematic trades.

For equity funds, once-invincible Big Tech shares became laggards this year as rising interest rates made lofty valuations look perilous, while formerly-underperforming value stocks rebounded. Wider dispersions across stocks helped rules-based managers with diversified market exposures – especially those running long and short trades. A benchmark from research provider PivotalPath showed equity quants posted a 5 per cent return this year until November, compared to a 1 per cent loss for hedge funds overall. 

Meanwhile, for trend followers and systematic macro funds, inflation fuelled big – and sustained – swings across assets from equities to Treasuries, just as discretionary managers struggled to adapt to the end of cheap money. 

Razvan Remsing, director of investment solutions at Aspect Capital, said: “The removal of the Fed put during 2022 has resulted in significant directional moves in markets. Some of the best opportunities have materialised on the short side of fixed-income.” 

The Fed put refers to the idea that the Federal Reserve will step in to limit serious market declines in the US.

A Societe Generale index showed that consistent trading patterns from currencies to bonds also helped alternative risk premia strategies – factors across asset classes – gain nearly 4 per cent this year. This took their rebound to 12 per cent since end-2020.

But it is still too early to claim that quant managers are roaring back for good. Recently, as markets dialled back rate-hike expectations on signs that inflation has peaked, this year’s big trends began to reverse, undercutting quant returns.

More broadly, the industry famously struggled in the decade of cheap money, stoking persistent concerns that the market has become too efficient for the strategies to work, or that the trades were too crowded.

The revival might have come too late, said Antti Suhonen, senior advisor at hedge-fund consultancy MJ Hudson. He estimated that the total assets of alternative risk premia strategies, for instance, have dropped as much as 50 per cent since the end of 2019, when he made a US$200 billion estimate. 

“A lot of people have just given up,” he said, referring to clients. “They’re like: ‘It’s not on my agenda because it hasn’t worked for the last 10 years, and yes, this year has been good, but is it just a flash in the pan?’” 

Managed-futures funds – which include trend followers – drew US$8.7 billion this year after a US$13 billion haul in 2021, eVestment data showed. Yet fund liquidations still exceeded launches this year – which has been the case every year since 2015, based on figures from Preqin, an investment data company.

The pitch now is that markets are set to remain volatile in the era of a hawkish Federal Reserve. For quants that say their diversified investing methods offer alternatives to traditional strategies like the 60/40 portfolio, gains this year are making that an easier sell.

“Allocators will need to rethink their allocation,” said Braga of Systematica. “They’ll have to rely on uncorrelated strategies much more. The idea that you can have a 60/40 as a solid baseline is gone forever.” BLOOMBERG