(Bloomberg) - The math wizards of Wall Street are notching dream returns in this nightmare year for global markets.
Famous quant firms like AQR Capital Management, Man Group and Aspect Capital are riding high as inflation-fueled turmoil trashes many of their human counterparts in the stock and bond world.
Macro-driven volatility is fueling powerful one-way price trends, while creating new winners and losers as well as widening the performance gap between companies and assets — perfect conditions for this rules-based cohort.
AQR’s Absolute Return Strategy has surged 40.9% through November, set for its best year ever, according to a person familiar with the matter who declined to be identified discussing returns. Man’s $11.6 billion AHL Alpha is up 10.7% through November. Aspect’s Diversified fund jumped 37.9% through Dec. 7.
Overall, a benchmark for trend followers is set for its best year in data going back to 2000, while a typical factor portfolio is headed for its biggest annual gain since at least 2008.
It’s a world away from the low-volatility bull market that caused a near-existential crisis for computer-powered portfolios.
“There are some overarching macro themes that are alive and kicking at the moment: inflation, decarbonization, disruption of the supply chain, the war in Ukraine,” said Leda Braga, founder of the $16 billion money manager Systematica Investments, whose trend-following Alternative Markets fund is up 16.5% while its BlueTrend strategy has gained about 30%. “The next 10 years are going to be very different from the last 20 years.”
It’s hard to generalize when it comes to quants — a label that encompasses everything from factor funds trading on rules like how cheap a security looks to black-box investing styles that deploy artificial intelligence and alternative data. But while not every fund has thrived in 2022, the end of near-zero rates is proving a boon to a great number of systematic trades.
For equity funds, once-invincible Big Tech shares became laggards this year as rising interest rates made lofty valuations look perilous while formerly underperforming value stocks rebounded. Wider dispersions across stocks helped rules-based managers with diversified market exposures, especially those running long and short trades. A benchmark from research provider PivotalPath shows equity quants posted a 5% return through November, compared to a 1% loss for hedge funds overall.
Meanwhile for trend followers and systematic macro funds, inflation fueled big — and sustained — swings across assets from equities to Treasuries, just as discretionary managers struggled to adapt to the end of cheap money.
“The removal of the Fed put during 2022 has resulted in significant directional moves in markets,” said Razvan Remsing, director of investment solutions at Aspect Capital. “Some of the best opportunities have materialized on the short side of fixed-income.”
Consistent trading patterns from currencies to bonds also helped alternative risk premia strategies — factors across asset classes — gain nearly 4% this year, taking its rebound since end-2020 to 12%, a Societe Generale index shows.
It’s still too early to claim that quant managers are roaring back for good. Recently, as markets dialed back expectations for rate hikes on signs that inflation has peaked, this year’s big trends started to reverse, undercutting quant returns.
More broadly, the industry famously struggled in the decade of cheap money, stoking persistent concerns that the market has become too efficient for the strategies to work, or that the trades were too crowded.
The revival might have come too late, says Antti Suhonen, senior adviser at the hedge-fund consultancy MJ Hudson. He estimates total assets of alternative risk premia strategies, for instance, have dropped as much as 50% since his $200 billion estimate at the end of 2019.
“A lot of people have just given up,” Suhonen said, referring to clients. “They’re like: It’s not on my agenda because it hasn’t worked for the last 10 years and yes, this year has been good, but is it just a flash in the pan?”
Managed-futures funds – which include trend followers – have drawn $8.7 billion this year after a $13 billion haul in 2021, eVestment data show. Yet fund liquidations still exceeded launches this year – which has been the case for every year since 2015, according to figures from Preqin.
The pitch now is that markets are set to remain volatile in the era of a hawkish Federal Reserve. For quants that say their diversified investing methods offer an alternative to traditional strategies like the 60/40 portfolio, gains this year are making that an easier sell.
“Allocators will need to rethink their allocation,” said Braga at Systematica. “They’ll have to rely on uncorrelated strategies much more. The idea that you can have a 60/40 as a solid baseline is gone forever.”
By Justina Lee and Nishant Kumar
