The machines are officially winning.
Investors who’ve relied on a standard 60/40 portfolio this year have taken a bath as stocks and bonds have tumbled. Crypto traders aren’t faring well, either. Even gold, the go-to safe haven in volatile times, is underperforming.
But for a small subset of specialized hedge funds known as quants, the chaos of 2022 has unleashed a windfall.
While the S&P 500 is down more than 13% this year, quant hedge funds — which rely on complex mathematical models to make investing decisions — are up more than 15%, according to HFR, a hedge fund research group.
“Macro hedge funds experienced a historic quarter,” says Kenneth J. Heinz, HFR’s president. “Since the beginning of the year, macro strategies — in particular macro strategies that are quantitative, trend-following or commodity-oriented — have produced extremely strong performance.”
That may seem odd to casual market observers. After all, the hedge funds making headlines lately are most notable for their losses. Melvin Capital, once one of Wall Street’s most successful hedge funds, announced earlier this month that it is shutting down. New York-based Tiger Global has reportedly lost $17 billion in this year’s tech selloff.
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“If you owned growth stocks this year — like we did at Altimeter — you got your face ripped off,” tweeted Brad Gerstner, CEO of tech-focused Altimeter Capital, earlier this month.
But quants are unique sub-species of hedge fund. Essentially, their highly secretive mathematical models are taking in the price of liquid assets, mostly futures contracts, and forecasting based on trends which way the market is likely to swing.
There’s no emotional, fallible human at the wheel the way there would be with most other managed funds.
Quants are “by definition unemotional,” Heinz tells me. These funds make up just 17% of the industry, but institutional investors are increasingly taking note.
In the first quarter of this year, institutional investors allocated the largest amount of new capital to hedge funds since 2015, according to HFR. Quants are leading the industry through “extreme volatility” — inflation at four-decade highs, tightening monetary policy, and the Russian invasion of Ukraine, including surging commodity prices.
So, why doesn’t everyone just follow the quant strategy?
This upswing for computer-driven funds is relatively new, and has come as a result of a breakdown of historical correlation between equities and bonds. But Heinz says he expects to see more money investors allocating capital with macro-focused funds. Strong performance attracts capital, and “we’ve obviously seen a good example of the type performance that institutions are interested in,” he says.
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