Pretty interesting - some of the best quants got crushed this year, not just relatively but are down a good amount. Conversely, the traditional fundamental guys knocked it out of the park. This was surprising to me as quant funds seem like all the rage and there is a constant chatter of quants being the death of fundamental...yet in times in market volatility, at least for now, this hasn't shown to hold true. It's something that fundamental guys have been saying for years...of course quants will do well in a bull market, but what about in times on volatility ...well now we know. I'm sure they will continue to adapt and improve for but for the time being, the war has not been won and fundamental smucks like myself will live to see another day.
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It's a good reality check at a time when everyone is trying to be a quant. These funds became successful not by simply being quant, but by seeing and doing things others were not doing at the time. Now that everyone is trying to copy them, it no longer works so well.
Also, these huge quant funds have grown too big in terms of AUM, and their business model has become like a huge asset manager with higher fees. The LP clients are not paying for alpha anymore, they are paying for exposure to a process run by the biggest names in the industry so they can keep their own jobs. Many quant funds that have kept their AUM down have actually done very well this year (in fact Rentec's own Medallion is up by 60%+).
where did you hear the 60% number for Medallion?
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This is incorrect. Medallion is still capped at 10B, as reported by the WSJ, as it has been for many years. They returned 6B+ on that this year.
I put very little stock in these sorts of articles - they pop up every other week and I rate them pretty much as clickbait. The best quant funds don't post their returns publicly and try to avoid publicity, for good reason. Medallion, TGS, PDT, or the flagship stat arb funds for Two Sigma and D.E. Shaw, are all conspicuously missing from any hedge fund returns list you might find. And besides Medallion, good luck finding any of their returns at all. These are just the more "known" ones, there are many others that consistently post amazing returns on good AUM.
As a result, there's a strong selection bias in the observable returns for quant funds: the ones that do publicly announce returns on BB tend to be large, high capacity, beta offering funds trying to attract investors to make the management fee. Not that there's anything wrong with this - they don't market themselves as anything else and people investing into them tend to know what they're getting, but it's just a different business model and can't really be compared in the same way.
Sorry but this cuts both ways...both in touting the published returns of quant funds beating active in the past...as well as not all active funds that do well post numbers. On a like for like basis, the article holds water...despite what you saying having some credence.
Partially agree - though in the fundamental space, it looks like there are at least some "known" top performing names on the list (at least based on my limited knowledge in that field). In the quant space, I don't see (and in fact have never seen on any publicly available list) the returns of a top performing fund.
To clarify I'm not saying that quant funds are better than discretionary funds or the other way around, what I mean is that articles attempting to compare raw returns of fundamentally dissimilar strategies without acknowledging the normalising factors should be taken with a massive pinch of salt. Like those articles coming out every week saying that active investment, both quant and discretionary, is dead because you can't beat the S&P 500.
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I believe the founding partners were protégés of Ed Thorp who worked with him at Princeton Newport. Around when that shut, they started TGS. As of the early 2010s, they had given over 13 billion to charity over a couple decades, so they were pulling in at least in the high hundred millions to low billions of pnl annually on their own money. I think on hackernews somebody mentioned they only recently got to an employee count over 100.
So I’d guess it’s probably smaller absolute returns than Renaissance’s fucking ridiculous ~7B pnl average over the last decade, but given that Renaissance have ~3x employee count and that we have never had actual numbers about TGS (only a very conservative lower bound given by their charity) I wouldn’t be surprised if they’re similar on a “per employee” basis. There is at least one public instance where TGS outbid Renaissance (and Citadel) for an excellent developer.
Two sigma's results often get "leaked" when they were doing well in the past years. That we have not heard much this year is telling. Medallion is an internal fund, which returns cannot be verified by any external parties.
The first-level trend following quants will be wiped out in a "regime change". Finding shallow factors and trade on it just become a momentum game when all the smart betas and shtty quant shops just pile on the same factors.
On the other hand, Jim Simons knows the trends he finds are not long lived, that's why he and his Medallion folks need to try a lot of hypothesis (from non-finance disciplines) on many data sets to find the next trends (and hopefully lots of them).
Articles like these are more entertainment/gossips than real news or analysis. For starter, investors do not look at return alone to decide if a fund is performing and certainly not return over a single year. It is much more nuanced than that.
Having said that, the quant space does have issues. The industry is overcrowded with posers that are selling betas, risk premia instead of alphas after the hype train started post GFC. Way overdue for a clean-up imho.
It's true that returns over one year are not that relevant, but a -30% return is still terrible. These funds are not primarily capturing beta (or else they would be up for the year) and are not marketed that way to clients.
I think quant funds necessarily have to be capacity limited to perform well, maybe in the $1-10b range. The larger the AUM (and average holding period), the more they end up competing with discretionary funds that have a big edge in years like this, and the more the whole business model changes.
Yes, much agreed though not every quant fund suffered -30%. I share your opinion that the problem is capacity related. When I say beta, I mean more than just beta to the market. It can broadly include exposure to momentum, value, etc. It is not similarity to discretionary strategies, but exposure to these overcrowded risk premia that is the issue. I suspect many large quant funds have been nothing more than overpriced risk premia funds for the past few years at least.
Not surprising that fundamental oriented quant strategies do poorly in a one off event like a pandemic, they have no sample size to train off of, and nobody is kidding themselves into thinking some AI is going to figure out how Covid and the policy response will impact the fundamentals of companies. Any edge from quant signals were drowned out by overwhelming noise from Covid and policy related moves, so fundamental quants were basically a coin toss this year. However, liquidity provision strategies excel in a crisis as everyone moves money around. Statarb strategies had one of their best years in a long time, as well as other liquidity provision strategies, so the capacity constrained quant funds and market making firms made a fortune.
Any examples of these stat arb teams that did well? What kind of returns and sharpe were generated?
WorldQuant
The fund I'm at did particularly well, finishing the year up double digits. Most of the signals I work on (or have the ability to look at) have had one of their best years in the last decade, and my guess is most statarb funds are trading similar strategies.
There are plenty of large quant funds that destroyed this year. You just don’t know about them.
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