Glitchy coronavirus markets cause quant funds to misfire

Some of the best-known IT hedge funds have struggled to adjust to the chaotic markets shaken by the coronavirus, with Renaissance Technologies, Two Sigma and DE Shaw having seen some of their biggest funds suffer this month.

Quantitative funds rely on powerful computers, large data sets, and algorithms to systematically exploit price trends in securities. Their success has spawned a multitude of copiers and has led many traditional investment groups to try to emulate their techniques. DE Shaw, Two Sigma and Renaissance – considered the gold standard in quantitative funds – now manage nearly $ 200 billion combined.

But the ferocity of the recent market crisis has inflicted painful losses, forcing many quants to go back. A large hedge fund investor called the numbers in his quantitative portfolio a “disaster”, while some say the setbacks look like a “quantitative earthquake” – a reference to a brief but traumatic period for the industry in August 2007.

Credit Suisse estimates that quantitative funds as a whole have almost halved the size of their positions since the beginning of the month, and that the average quantum fund has lost 14% this year. “This rapid outcome is indicative of the magnitude of the change in attitude towards the economic benefits of Covid-19,” the bank’s hedge funds office said in a note to customers on Sunday.

“There are weeks when risk becomes difficult to manage,” said Mark Connors, global head of risk advisory at Credit Suisse ‘s main services office. “Most funds have had a tough time with long and short in this environment.”

Renaissance, one of the most famous names in the industry, has seen its losses worsen in recent times. Its flagship fund Renaissance Institutional Equities, which tends to have mainly long positions, fell 18% in March, increasing its fall since the start of the year to 24%, according to figures. Renaissance’s diversified institutional global equity fund fell 15.8% for the year on Friday.

The Long Island-based group, founded by mathematician and former code breaker Jim Simons, has in the past two decades established an enviable performance record. Its flagship Medallion fund was so successful that it expelled external investors in 2005 and has since been limited to managing the money of Renaissance executives. Last year, Simons said that Medallion has generated an average annual return of about 40% since 1988, net of fees.

Two Sigma also found the environment unusually delicate. Its flagship Spectrum fund was down almost 2% over the year, according to a source close to the results. But his Compass “global macro” fund did worse and was down 13% on Friday, while his Absolute Return fund lost 3%.

Two Sigma was founded in 2001 by computer scientist David Siegel and mathematician John Overdeck, who met while working together at DE Shaw (where they straddled Amazon founder Jeff Bezos). Although younger than Renaissance and DE Shaw, Two Sigma has grown rapidly over the past decade and is widely considered to be at the forefront of the systematic investment industry.

Meanwhile, the main fund made up of DE Shaw – which has suffered only one year of decline in the past two decades – lost 2.6% in the past Friday, placing it in negative territory for the month. ‘year.

The New York group’s global macroeconomic fund Oculus fell 0.8% this month, but remains an outlier in the world of hedge funds with a gain of 2.5% so far in 2020. But the resilience at the beginning of the year of DE Shaw’s costly “statistical arbitrage” the hedge fund Valence faded during the extreme volatility of last week. It has now dropped more than 9% for the month and is down 4.6% for the year.

The fact that even Valencia has been affected shows how perfidious the markets have become. Valence charges 3.5% for the assets it manages and takes 35% of the profits it generates, almost triple the industry average.

Statistical arbitrage – systematically exploiting small but reliable relationships in the markets – was DE Shaw’s first strategy when it was launched by computer scientist David Shaw in 1988. The company ranks fifth among hedge funds best performing of all time, according to an annual ranking of LCH Investments.

The trio’s performance may still be far better than the industry average, but it’s a reversal of fortune from previous bouts of volatility that the group has largely managed to manage. For example, the flagship investment vehicles of Renaissance, Two Sigma and DE Shaw all posted big gains in 2018 despite rough conditions that year.

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