Quant deep dive – Aug 22

Performance

Quant has exhibited exceptional positive performance over the 12 months to August 2022, delivering an average return of 12.8%. The strategy was positive for 9 of those 12 months, with the worst monthly drawdown in July 2022 when the master strategy was down 2.1%. The best monthly return for the period was 3.9% followed closely by 3.7% in March 2022 and April 2022 respectively.

The second largest strategy monitored by Aurum’s Hedge Fund Data Engine by AUM is quant, accounting for $445bn out of $3,143bn combined AUM monitored as at August 2022. The quant master strategy AUM over the period grew by $42.8bn; the growth was primarily due to net profits of $47.8bn with net outflows of $5.0bn, while the total number of quant funds monitored decreased by seven funds from 483 funds to 476 funds. At a sub-strategy level, the variance in observable funds were -6 funds across CTA, -5 in risk premia, -3 in quant equity market neutral and +7 in statistical arbitrage.

Net assets increased by $42.8bn over the 12 months to August 2022.

In terms of performance, quant was the best performer of all the hedge fund strategies observed in the 12 months to August 2022. All sub-strategies apart from risk premia had positive performance over the review period. It should be noted that there was a high level of performance dispersion between the top and bottom performing sub-strategies, ranging from -3.7% for risk premia to +20.6% for quant macro.

At the sub-strategy level, quant macro, CTA and statistical arbitrage outperformed, while risk premia and quant equity market neutral were more challenged. Both quant macro and CTA were well positioned for rising inflationary pressures through long positions in commodities, US dollar, and short fixed income. Statistical arbitrage benefited from elevated intra-month stock volatility and increased cross-sectional dispersion.

NET RETURN OF MASTER AND SUB STRATEGIES (1 YR)

*HF Composite = Aurum Hedge Fund Data Engine Asset Weighted Composite Index. **Bonds = S&P Global Developed Aggregate Ex Collateralized Bond (USD). ***Equities = S&P Global BMI.

Sub-strategy performance

Quant macro was the strongest performing quant sub-strategy generating an asset weighted average net return of 20.6%. The strategy recovered from their worst 12-month rolling performance over five years of -7.5% in July 2020. Quant macro has benefited from global inflationary pressures that have driven the Fed and other central banks to end their accommodative monetary policy. The sub-strategy has profited from long positions in energy, US dollar and short fixed income. CTA is the second best performing quant sub-strategy, benefitting from very similar positioning to quant macro as reflected by having very similar monthly return distributions over the trailing 12 months.

Quant macro has benefited from global inflationary pressures that have driven the Fed and other central banks to end their accommodative monetary policy.

Risk premia – the worst performing quant sub-strategy – generated a return of -3.7%. These losses, even though they are relatively modest when compared with equity markets, are harmful for a sub-strategy that has struggled to deliver meaningful returns over 10 years. Most of the recent losses can be attributable to bond carry trades, which tend to exhibit a net long duration risk. Long positioning in fixed income underperformed as prices fell and yields rose resulting from a tightening monetary policy from central banks, elevated inflation levels and declining appetite for fixed income.

Statistical arbitrage was the most consistent strategy with a 12 month standard deviation of only 2.7% with 11 out of 12 months delivering positive returns and the only down month detracting 0.5%. When viewing statistical arbitrage on a risk adjusted basis, it has delivered a Sharpe ratio of 2.17 over 3 years, significantly outperforming the quant master strategy that has a Sharpe ratio of 0.63.

Longer-term performance

Analysing the sub-strategies’ performance over several time horizons provides a comprehensive overview of performance across business cycles. When extending the look back period to three years, five years and ten years, statistical arbitrage consistently outperforms the other sub-strategies (see page 11 of the report). While quant macro has outperformed the broader hedge fund universe more recently, its performance over ten years was less impressive. The long-term underperformance of risk premia reflects on its low level of excess returns from specific risk across the quant universe.

Alpha extraction

The standout performing sub-strategy when evaluating the alpha/beta decomposition for each of the sub-strategies relative to global equities is statistical arbitrage. Since January 2013, only 2% of the cumulative dollars generated within the statistical arbitrage strategy are attributable to beta. On the other hand, most of the gains are attributable to alpha (see page 10 of the report). The high proportion of alpha gains is understandable given the strategy’s low net equity exposure and trading style.

Risk premia has the lowest alpha contribution across the sub-strategies within quant, and predictably has a high level of negative alpha since January 2013 (see page 10 of the report). The sub-strategy experienced a material drawdown in March 2020 resulting in negative PnL attributable from both alpha and beta and since then it has not been able to recover.

Since January 2013, only 2% of the cumulative dollars generated within the statistical arbitrage strategy are attributable to beta.