Was 2022 the grand re-set for quant hedge funds?

Quant investing has had a good year. Trend-following hedge funds, which use mathematical models to try to predict market movements, have flourished in 2022.

Close to 22% of hedge funds worldwide now deploy quantitative investment strategies in their portfolios. So says SigTech’s 2021 annual Hedge Fund Research report.

The $337bn industry is now making its biggest gains since the 2008 financial crisis, according to data provider HFR.

Artificial intelligence-driven funds are fuelled through the analysis of large amounts of data in real time. The insights drive subsequent investment decisions.

The tumult in equities, bonds, commodities, currencies and other asset classes this year has provided the perfect setting for trend followers to detect clear trends and patterns in value and momentum.

Quant hedge funds in 2022 have also benefited from a surge in energy and commodity prices, fuelled by supply chain bottlenecks and Russia’s invasion of Ukraine.

“Now is one of those 2008 moments where everyone [in trend-following] is doing well again. The trends are clearer,” Leda Braga, founder of Systematica Investments and former head of systematic trading at BlueCrest, tells the Financial Times.

Its BlueTrend fund, which draws upon scores of sub-signals from as many as 15 alpha families, is up 26% so far in 2022, its best performance in 14 years.

Its success shows how the knack of generating differentiated alpha requires new and differentiated approaches to investing.

Combining the best aspects of traditional finance with evolving fields of data science, statistics, and engineering, these funds are proving, can deliver new intelligence to understanding the relationship between distinct data sets.

The most successful trading algorithms deploy a blend of unique and innovative approaches, from machine learning to neural nets to classical economic theory.

The big question for quant managers though is always the same. In a world of seemingly unlimited data and far more computing power than anyone could have imagined even a decade ago, what precepts of the process should they keep?

Quant funds like BlueTrend — also known as managed futures funds — can make money from keying into persistent price trends in both rising and falling markets, which has often allowed them to profit during periods of market stress.

The incorporation of alternative data and machine learning has been less the idea that traditional fundamental approaches don't work.

Big data and machine learning offer an opportunity to move toward areas of the market where increasing amounts of available data offer advantages to generate returns. These could be economic data points; up and coming global asset values, or real-time company news.

In 2008, we saw quant hedge funds profit from both the abrupt increase and then subsequent collapse in oil prices, and from a rapid sell-off in equities as the financial crisis reached rock bottom.

This year’s encouraging upswing in performance, however, follows years of often-lacklustre returns, with trend followers losing money in six of the eight calendar years between 2011 and 2018, according to HFR.

The COVID-19 pandemic in early 2020 proved challenging too for quantitative investors as some of the underlying strategies were caught wrong-footed.

This led many to question if managed futures funds can any longer effectively identify tradable market patterns for competitive advantage.

So if the tide has turned, the question is, is this simply a temporary reset?

The answer remains to be seen but as 2022 has shown, volatility is proving to be the quant’s secret weapon.

With that looking likely to persist, trend-following funds can expect more allocations coming their way from clients in 2023, in what many expect to be a stagflationary world…