Editor’s Letter

Issue 111

Originally published in the February 2016 issue

As 2016 starts with one of the worst ever equity market performances, systematic and quantitative (SQ) funds are topping the performance tables, with traditional trend-following CTAs in the lead. As markets move into uncharted territory, dispassionate SQ funds seem well placed to cope. Oil and various metals have, for some time, been trading well below marginal production costs for much of the supply curve, but the glut of these commodities stubbornly persists, and trend models have followed prices down. They have also profited from the continuing appreciation of government bond prices. Negative interest rates were dismissed as temporary or anomalous by some discretionary traders. Now those prices above par look like prescient signals, with at least five central banks (in the Eurozone, Sweden, Denmark, Switzerland and Japan) setting official interest rates below zero – and some academic economists are proposing more radical policies that could drag rates further into negative territory. Eliminating cash is not as outlandish as it might sound, with electronic payments ubiquitous and physical currency already down to a single-digit percentage of overall currency in some countries.

But trend following is only one of many SQ strategies. Research from Societe Generale Prime Services regularly illuminates the diversity of the space. Those funds trading mean reversion strategies – essentially the opposite of trend following – have also done well, typically over shorter time frames than the trend community. One shorter-term CTA, Altiq, is profiled in this issue. SQ funds are also making extensive use of fundamental data. This issue’s cover story, Informed Portfolio Management (IPM) AB, is exclusively fundamental, while other SQ funds mix technical and fundamental inputs that can include variables like weather data.

The advance of artificial intelligence allows SQ funds to mimic the thought process of fundamental fund managers by modifying accounting data, and building gargantuan models that track the entire supply chain around companies, from inputs and suppliers to customers and competitors. These models have accurately anticipated many of the profit warnings and dividend cuts that have apparently surprised other market participants since the third quarter of 2015.

For several years post-crisis, many SQ funds struggled to generate positive returns partly as volatility was low, correlations were high, and dispersion amongst securities, sectors and markets was low. This publication continued to regularly profile leading SQ funds because we know that institutional investors take a long-term view, and contrarians can even tilt their portfolios towards those strategies that have recently lagged. Patterns of performance move in cycles, so it would be rash to suggest that quant funds will take over the investment industry, and indeed discretionary funds including Passport, Horseman and Saba are posting punchy numbers this year. At some stage, the best discretionary traders will prove more adept at picking turning points in markets and in identifying oversold securities. But so far in 2016, quant funds are, on average, in the lead.