Looking at the top ten of Institutional Investor’s Alpha Hedge Fund 100 List brings to life a statement made by Elliott Management founder Paul Singer. He noted that an investor achieving a strategic objective by investing in a fund makes hedge fund fees more palatable. Elliott Management, which was one shy of making the top ten list, engages in a wide variety of strategies that are at times dependent on the performance driver of aggressive persuasion. Such discretionary tactics that at times can involve emotional decisions are an issue that many of the managers in the top ten and their systematic processes seek to avoid, including Winton Group.
Alpha hedge fund 100 list: Singer misses the top ten list but shares many nontraditional returns performance drivers
For 40 years, Elliott Management has done what might be considered an improbable task: beating a stock market benchmark. The firm, which raised nearly $5 billion in one day when the fund was briefly opened to new investors, delivered an average of 2.4% alpha above its beta benchmark every single year sees the current fee issue from an entirely different perspective. He thinks the ability of a hedge fund manager to hit specific investment allocator objectives “should be considered more important than the profit that accrues to the service provider,” Singer wrote in a letter to investors.
While they didn’t make it into the top ten, Elliott Management, number 11 with $31.3 billion under management, shares a common trait with the biggest and the best: they often engage in nontraditional methods of investing to achieve noncorrelated returns.
Elliott Management finds their alpha, at times, using methods of intimidation with Argentine government officials and shaking up corporate management, with BHP Billiton the latest target said to be discussing how to handle Singer’s unique form of “alpha.”
Alpha hedge fund 100 list: Winton Group shares a heritage with Man Group, AQR and to an extent Two Sigma and Renaissance Technologies
While Singer and his crew make discretionary decisions to execute a strategy that delivers independent returns streams from that of a stock market benchmark, many on the top ten list rely on computers to take an unemotional look at the world of investing.
London-based Winton Group has long been a stalwart at advocating for systematic strategies and a cold, calculating arithmetic approach to investing. The historic Winton Group, at number ten with $32 billion under management, is two notches below New York-based Man Group, the mothership from which David Harding and Winton Group were spawned back in the 1980s. Man AHL was eventually formed as a result of Harding one of the first to digitize market signals and engage in a managed futures trend following strategy, one that has blossomed in a variety of directions, with Winton Group being one such offspring.
Man Group shares characteristics with many of the funds in the top ten list, perhaps most specifically with the number two ranked AQR Capital Management, with $70 billion in fund assets. Cliff Asness, known in equity circles as “Mr. Momentum,” was one of the early quantitative investment managers who founded AQR. The former Goldman Sachs executive has built quantitative strategies, some of which is tied to common market factors such as trend following but where a significant difference can typically be found in risk and volatility management.
Perhaps illustrating the “new school” of quantitative investment management, New York-based Two Sigma, with offices in fashionable SoHo, not on Wall Street, is known among quantitative analysts to have among the more progressive outlooks on market environment diversification.
Two Sigma, with nearly $39 billion under management, is one notch below New York-based Renaissance Technologies, a firm with a similar tight lip when it comes to strategy discussions but one who had its roots in the managed futures CTA world.
In fact, of the top ten in the Institutional Investor’s Alpha Hedge Fund 100 list, six are firmly categorized in the quantitative investment space, all with managed futures CTA roots or a strong sense of how such strategies operate. Even the number one firm the Hedge Fund 100 list, Bridgewater Associates, with $122 billion under management, has described itself to ValueWalk as one of the early systematic, math-based thinkers that use discretionary analysis to establish trades.
The list shows how the Quants are not just taking over Wall Street, but how they are redefining its core essence in the process. Buy, hold and let the investment work on its own is not the strategy favored by the elite of the elite.
The Institutional Investor Alpha Hedge Fund 100 list comes as Barron's publishes a list of the best three-year average performance of hedge funds, which has a very different look to it. While Renaissance Institutional Equities and Two Sigma are on the list along with CTA ISAM Systematic and statistical arbitrage strategy Blue Diamond Non-Directional, the list of top performers is focused on more niche players.