North American quantitative fund managers have been positive in nine out of 11 monthly major risk events, a EurekaHedge report noted. The volatility of these quant funds was generally in the low single digits across geographic regions, where notable differences in performance were noted. The rise of the quantitative hedge fund is leading to an expansion of strategies, the April report observed, with sentiment indicators starting to creep in among more traditional pattern recognition factors.
Quants funds looking to expand their strategy set
Quantitative hedge funds have traditionally used price pattern analysis to make trading decisions. Often this strategy evolved from basic trend following analysis to more sophisticated methods of trend identification, relative value opportunity determination that is dependent on mean divergence and convergence, and volatility and risk management systems.
The industry is again expanding its strategy reach, the EurekaHedge report “Man versus Machine: Quantitative Hedge Funds” observed.
“While these systematic hedge funds have been employing methods of technical analysis into their trading strategies, sentiment analysis is also an up and coming feature in investment decisions,” the report stated. “Text-mining data collected from various sources could be an indicator of ground sentiment during key market events, which can then be used as inputs in trading models or for risk control.”
These hedge fund primarily trade derivatives and equities, with currencies, commodities and fixed income rounding out sizable portfolio holdings.
Quant funds outperform Long / Short strategies since 2006, North American quants best at delivering performance during crisis
Quant funds, as they are known, have outperformed the Eurekahedge Long/Short Equities Hedge Fund Index since 2006, gaining 100.11% versus 75.10% for the Long/Short equity players, but globally focused quant funds underperformed, up 73.20% during the study period. North American quant funds have been positive since 2011, while such funds with an emerging markets focused beat emerging markets indexes with gains of 88.09% since December 2006.
EurekaHedge noted that on a three and five-year basis, North American quant funds posted the best Sharpe ratio among regional mandates at 0.69 and 0.79 respectively. The strong Sharpe ratio is in part due to lowered volatility. North American quant funds posted a five-year volatility of 3.05%, among the lowest standard deviation of all hedge funds, with a generally modest five year annualized return profile of 3.12%. Global quant funds had higher five-year volatility, at 4.90%, and lower returns, at 2.12%. The Eurekahedge Long/Short Equity Hedge Fund Index, by contrast, had five-year annualized volatility of 4.99% and annualized returns of 6.31%.
Correlation among quant fund types oddly varies across regions:
North American mandated hedge funds and managers with a global mandate have shown the strongest correlations whereas the strength of correlation between global and other regional peers are much weaker. The correlation strength is the weakest between globally mandated funds and Asia Pacific focused peers, which could be a potential case for regional diversification across the spectrum of quantitative strategies. While some Asia Pacific hedge funds also have exposure into emerging markets, it is interesting to note that the correlation strength between Asia Pacific and emerging markets is moderate at best. From this correlation table, we can also see that Europe and Asia Pacific mandated quantitative hedge funds posted relatively stronger correlation to the Eurekahedge Long/Short Equities Hedge Fund Index, which could indicate the instrument-weight traded by managers of these mandates.
What has often defined the category is how a quant fund correlates during crisis, a traditional metric prized by allocators. Here North American quant funds were the best performer, delivering positive crisis performance in 9 of 11 events. European quant funds, by contrast, were only positive in 4 of 11 negative events while the EurekaHedge Long/Short index was positive in only 3 of 11 crisis events.
north american quant funds EurekaHedge