Investors Keep an Open Mind Towards Quantitative Hedge Funds
Many investors tend to allocate to funds that are actively managed with a fundamental approach. They like the fact that managers review historical data, such as financial statements, competitive advantages, and the overall state of the economy when building a hedge fund portfolio.
Since the beginning of this year, however, investors have been opportunistic in their hedge fund allocations and willing to consider managers implementing a quantitative process. From the first to the second quarter, BHA’s research shows that there was a 25 percent increase in the number of quantitative hedge fund mandates. So far during this third quarter, that growth has been sustained.
Quantitative analysis is quite different from the traditional fundamental approach. In the former, managers construct trading models that analyze vast amounts of historical data, such as the prices of securities, the rates of returns, and the risk parameters. These models also consider the statistical analysis of such information from other sources. Some managers program the models to determine when trades are to be completed but have a trader executes the trade. Other managers program the model to complete all tasks.
Many managers are quite successful using this approach. For example, many CTA managers implement a systematic style for their funds. CTA models are traditionally constructed to be uncorrelated with the S&P 500 so they are less sensitive to daily market conditions, such as interest rate fluctuations and inflation concerns. Hence, CTA funds are popular hedging tools for traditional stock and bond portfolios.
The application of quantitative analysis to portfolio management has increased tremendously over the years thanks to the increase of technology. Managers now have access to more user-friendly software, numerous sources for data feeds, and powerful computers.1
From BHA research, it’s apparent that investors in 2010 understand that hedge funds implementing a quantitative style, or a mix of quantitative and fundamental analysis, are a way to broaden their opportunities for positive returns. A family office in New York recently expressed its interest in expanding its portfolio to include quantitative funds; it is specifically interested in systematic CTA funds. A corporate pension in the Netherlands is of the same mind. It mentioned investing in quantitative funds as a way to expand its investment objectives.
Hedge funds are instruments that allow qualified investors to access unique opportunities for positive returns. Adding quantitative funds to a their portfolios helps investors capture opportunities that they may have missed in the past. Many investors are searching for stable, niche funds with positive returns, and embracing a quantitative style is a way to accomplish that.
1 FINalternatives, “The Statistical Mystique,” July 30, 2010, http://www.finalternatives.com//node/13356?time=1282062326.