Oxford-Man Institute of Quantitative Finance

The hedge fund research centre comes of age

Originally published in the October 2009 issue

After nearly two years of collaboration involving the world’s biggest hedge fund group and one of the world’s elite universities, the Oxford-Man Institute of Quantitative Finance has moved into sparkling new premises spread over five voluminous floors at Eagle House in the city’s Jericho district. Peter Clarke, Man Group CEO, welcomed Chris Patten, Chancellor of Oxford University, to officially open the new facilities at a gala celebration on 24th September attended by 150 guests.

The link-up between Man Group and Oxford University dates from a 2007 commitment by the hedge fund operator to provide funding of £10.5 million over five years for a centre to foster close research collaboration between firm and university. Man Group spent £1.2 million kitting out Eagle House and provided a further £3.3 million to fund in perpetuity a chair for the first Professor of Quantitative Finance within the university, whose inaugural occupant is Professor Thaleia Zariphopolou. Professor Per Mykland is also joining the institute as the Man Professor of Finance and Statistics.

“The Institute provides Oxford with a facility to get things it was doing across the university into one place,” says Anthony Ledford, chief scientist at AHL, Man Group’s flagship managed futures fund. “This is a natural home for those quantitative people to bring their skills together. It is a very intimate relationship we have here between the university and the business.”

The Institute counts more than 60 research staff made up of members, associate members and advanced students. It is with the later group and their successors who enter into doctoral research programmes that Man Group hopes to forge a close relationship in the years ahead. A key aim is to secure a “first look” at pioneering quantitative research ahead of publication. “We can get a privileged view of that research,” says Ledford. “The real benefit comes from being part of the academic furniture. We are seeing benefits in terms of applications to AHL. It is a material benefit we feel we have here.”

AHL: special pedigree
AHL, of course, brings considerable clout to Oxford. With assets under management of $20.4 billion as of Q1 2009, and a two decade-plus track record of delivering average annualised returns of 17.8%, it has a special pedigree in the investment management industry. The thinking behind the Institute is that it will provide new ideas in trading, execution and portfolio management to help AHL continue to perform and stay ahead of increasing competition in the managed futures area. Tim Wong, an 18-year veteran and now CEO of AHL, says that investment in infrastructure and the focus on research has been a hallmark of Man Group’s stewardship of AHL.

“The focus on research and development is along the lines of academic research and that differentiates us,” Wong says. “It is not one person dictating the agenda and in hedge funds that is probably quite rare. We have a team culture and use peer reviews. It has been good to maintain balance in the team and develop new ideas. Size can give you advantages such as more funding to invest in the business. The Oxford Man Institute shows that.”

The key research disciplines at the Institute mirror the disciplines used at AHL. These include mathematics, statistics, physics, econometrics, various engineering disciplines including signal processing and computational science. “Our research members are people who are good at understanding data and putting a structure under it,” Ledford says. The ideal researcher combines problem solving skills, rigour and scientific method. “It is the scientific method these people acquire in their education which is what we are seeking,” he says. “It is a then a matter of applying that to the development of trading systems.”

In recent years, intensive research into trading systems and trade execution has become an increasing focus for AHL. This has helped to identify predictability across time spectrums and enhance the optimality of the trading system in around 60 markets that AHL trades. It has been applied to around $4 billion in assets under management and will have expanded applicability in future.

Recruitment drive
During the first two year of the Institute’s operation it had 10 researchers owing to facility constraints. The move to Eagle House means that research capacity has risen to 25 with the result that a recruitment drive is in full swing. This adds to the 50 additional research staff Man Group has based in London. The aim is have researchers spend time in both locations.

Professor Zariphopolou, who has become the first Man Professor of Quantitative Finance at Oxford, joins from the University of Texas at Austin. She admits that the rupture in financial markets over the past year poses challenges to model-based quantitative analysis and management of financial risk. But the up-shot is that a new approach is needed, one which Zariphopolou argues can optimise the application of theoretical models to practical portfolio construction.

“The first era of mathematical finance is coming to an end,” she says. “It is time to build on it and create the next one. Existing models and theories need revising in the light of the recent crisis. Moreover, beyond derivatives, there are other areas of modern finance where mathematical techniques have not yet been developed or mobilised in full force.”

Another addition to the Institute over the summer is Per Mykland who joins as the Man Professor of Finance and Statistics from the University of Chicago. His wife Lan Zhang has also joined the Institute as a Senior Research Fellow and as a Reader in Finance and Econometrics at the University of Oxford from the University of Illinois at Chicago.

Mykland is to continue his research at the interface of statistics, probability, finance and high-frequency data. A theme throughout his work is the mathematical study of fair games, or martingales. He has applied martingale theory to devise lower risk trading methods so that even in a worst-case scenario reserves will cover losses – even if the trading model turns out to have been false. The calamity that swept markets a year ago has underscored both the need for reserves and the applicability of Mykland’s insights.

Interdisciplinary approach
“For me, the Institute bridges the gap between statistics, mathematics, economics and practical finance,” he says. “I don’t think there’s anywhere else in the world with so many leading groups working in so many different areas. It’s really a remarkable achievement.”

Eagle House was under construction in November 2008 when Man Group decided to expand the Institute’s capacity having outgrown the facilities at Blue Boar Court that were taken up in 2007. Eagle House underwent a complete interior fit-out to provide Institute members with a state of the art lecture theatre, more space for the Man Research Laboratory and additional office and meeting facilities for the expanding number of researchers and graduate students.

Neil Shephard, Research Director of the Institute and Professor of Economics at the University of Oxford, says the new centre provides the right environment to encourage interaction between colleagues from around the university and the Man Research Lab. The Institute is also the focal point for a weekly seminar series as well as a number of other Oxford University Practitioner Lectures in Finance and conferences on liquidity and financial econometrics.

“Our institute is unique as it brings together faculty and students from many departments within Oxford University to spend time together working on challenging research problems in finance,” Shephard says. “The last two years have amply demonstrated the need for impartial and talented scholars to break down intellectual boundaries, to study how our market do and should work.”