Quant Trading 2020 Review

Hedge Fund & Strategy Performance - By Henry Booth

(10-12min read)

            2020 was obviously a year like no other that affected all aspects of life, and the quantitative trading world was no different. The market crash and subsequent rally created huge despair, opportunity, and disparity across hedge funds. 

 Key trends

            Within the buy side quant trading world, groups like CSAM’s QT Fund[1], Ronin Capital[2], QuantPORT[3], OxAM[4] and others shut down, cut staff and return money. Leading to an influx of talent into the market, which was quickly snapped up, in particular their star players. After this came tremendous performance, where funds rode the rally and had record monthly performances, giving them ammo to hire with.

            Working from home has been both hit and miss. Some thrive without the office distractions as they get into a flow state and code quicker, for example. Many love no longer having a long commute and enjoyed the newly found work life balance. Yet, some struggled without collaboration, or with the endless Zoom calls to find that collaboration. And finding home life too distracting with children running round.

            A side effect of WFH has meant that candidates had more freedom to talk and more willingness to interview. Freedom to talk was so high, one fund apparently ordered people back into the office to put a curb on their interviewing and leaving.

            Dispersion of performance was a major theme of 2020 and showed investors the need to pick the right fund properly; equally pertinent advice to candidates. The top ten percent returned 50% on average, representing a difference of 70% between the top decile and bottom decile performers.[5]

Performance

            2020 was a wild ride for performance, feeling like a roller-coaster. During the year we saw several worst ever months for nearly all strategies, quant and discretionary alike, and the industry as a whole. Not so long after, we had several best ever months for groups and strategies as the market recovered.

            There was a tremendous difference from the top performer to the bottom. We have hedge funds returning 50%, 60%, even 70% plus. One family office, running a small multi-manager platform, scored triple digits returns of 155%. BlueCrest, no longer restricted in risk by clients, returned a whopping 95%[6]. Whereas others declined up to 40/50% at points and lost 30% after failing to recover.

            For funds 2020 average performance, discretionary equity long/short strategies were the winner, with nearly 18% yearly returns. Closely followed by multi-strat funds with 16% and event driven funds at 13%. Long only funds returned 10% and Macro delivered 8%.

            According to the Aurum Hedge Fund Data Engine[7], March was the worst month for performance across the industry and for all separate strategies for the last ten years. February wasn’t far behind, producing the 5th worst month for hedge fund returns in the last decade.

            The V-shaped recovery that followed provided best ever months. April was one of the top months for the past decade across a variety of strategies and the hedge fund industry. They carried this performance across the year. June, November and December all provided excellent months for a variety of groups and strategies.

            November delivered the best monthly performance for the last ten years for the whole industry, with the average fund returning close to 5% for the month. Nearly all strategies had their best month for the last ten years, all expect quant. It wasn’t until December that quant in general finally saw monthly performance that was in its top 5 best months for the last ten years.[8] It must be noted, quant includes all quantitative strategies, but as we’ll see, not all quant strategies were equal in 2020!

            Quant funds in general lost 5% over the year[9]. Again, this doesn’t reflect the accurate picture of quant because of huge dispersion within both groups and strategies.

            One of the biggest shocks was Renaissance Technologies losing 33% in its alpha fund and 22% in its Institutional Equities Fund. Interestingly, its Medallion fund returned 76% to make it its third best year in history supposedly[10]. The difference here shows the contrast between short-term holding periods, as in Medallion, versus the longer holding periods of its outside funds. Winton Capital, another well-known quant fund, lost nearly 23%[11]. Two Sigma is also reported to have lost around 5%[12].

            Multi-manger platforms arguably enjoyed their best ever performance. In fact, four months of 2020 entered their top 5 best ever months for the last ten years. Millennium returned 23%, Verition returned 27%[13]. Schonfled’s main strategic partners fund returned close to 10%[14]. Exodus apparently return 14%[15].

Successful strategies

            Index rebalance may have missed a rebalance but performed strongly. There are teams that recorded triple digit PnL numbers, with both PM’s and Sub-PM’s having personal best years. Even retail investors benefitted from an Index Rebalance trade of sorts, after being able to front run Tesla’s introduction to the S&P.

            Statistical arbitrage performed well across the year. There were mixed results in individual groups, but on average funds were 9% up for 2020. Shorter term holding, intraday to 3 days seemed to be the best, showing risk management advantages of pulling risk off quickly, with the average fund sinking only 1.95% in March, versus 8-15% losses for most other strategies[16]. Equally, it had the benefit of ramping risk back up quickly. Highlighted by April being one of the best months for a long time with 2.5%.

            Quant Multi-Factor strategies holding longer, weeks to months, struggled. Momentum was the winner over value, which has been the case for the last ten years according to some research[17]. Quant equity multi-factor strategies lost 16% in 2020 according to Aurum Funds which tracks 480 quant funds[18]. AQR’s global stock selection strategy lost 22%[19].

            Macro is a vast universe and performance was highly varied with some big names losing, such as Bridgewater’s flagship which lost around 20%[20]. There were some clear winners, as Brevan Howard had a stellar year, with its flagship fund up 27%, and even had one fund up 99%[21]. Caxton’s main macro fund returned 40% in 2020[22]. The average Quant Macro fund was down 8%[23] through October, but finished well to recover to a 4% loss according to HSBC Investment Performance Review. 

            Systematic CTA had wildly mixed fortunes last year. Typically, this market environment is when trend strategies shine. In 2008 they were the top performing strategy, returning 20% on average versus the MSCI loss of 40%. In 2020, however, they have failed to capitalise. To the end of October, the average fund was down around -5.5%. The last two months of the year provided much needed relief for some, as CTA strategies recovered 1.45% in November and 4.8% on average in December.[24]

            This does not paint a fair or accurate picture of systematic CTA, which debatably saw the biggest dispersion in performance. The crash in March saw the top performers return close to 10% for the month, while the bottom performing decile lost 10%.

            Some performed, with a huge 44% at Roy Neiderhoffer’s Diversified Fund and Systematica’s main Blue Trend fund finished strong and returned nearly 11%[25]. But others like Winton Capital, perhaps more quant macro than CTA these days, lost nearly 23% for 2020. Aspect were thankful for 5% returns in December to finish only 5% down, all according to HSBC Investment Performance Review. 

Redemptions and Inflows

            Redemptions appeared quickly and forced funds to shut. An estimated $63bn of outflows took place in the first half of the year across the entire hedge fund industry[26]. That reached $89bn by end of September[27]. They were concentrated on certain strategies, with CTA, event-driven and equity strategies being hit the hardest.

            Redemptions occurred at the lowest performers. The bottom ten lost 14% on average and nine out of ten had redemptions. Reallocations went to the top ten best performers[28]. While investors pulled $21.4 billion from computer-driven hedge funds through September, according to Eurekahedge.[29]

            There have been inflows. Groups like DE Shaw opened its funds to more cash[30]. Point72 closed its fund this year after raising $10bn since opening[31]. Millennium returned money after strengthening its capital base[32]. MAN AHL saw record inflows adding $1.7bn[33].

Hiring trends

            Hiring continued despite the pandemic, possibly more so than before. First, we had groups shutting down, which meant an influx of quality talent that was both immediately available and relatively cheap. These funds had some star PM’s and researchers that were eagerly picked up.

            After closures, several funds saw tremendous performance, which gave them PnL to hire with. The focus through the summer was on PM’s. Multi-manager funds like Millennium, Exodus, and Cubist were all hiring. Millennium brought on close to 70 new teams in 2020[34]. Exodus brought on 33 teams[35].

            There was an initial burst of bringing in the quant researchers from groups that shut down or had to make redundancies. However, quant researcher hires slowed over late summer. There was no need to pay to get a good one out of a team with all the talent on the market. Also, PM’s were wary about which way the market might move and did not want to increase costs.

            Technologists were in demand all year long. Especially at the sizeable groups, wanting to grow with new AUM. You can have all the star quant PM’s in the world, but if you don’t have the platform for them, it will not work. So where you see PM hiring, quant developer and software engineer hires followed closely. The difficulty is finding those good enough.

The year saw some big hires. Ross Garon from Cubist joining Millennium. Denis Dancanet was hired by Point72 / Cubist to replace Ross as President of Cubist. WorldQuant hired a Chief of Artificial intelligence, and Gary Chropuvka as President from GSAM. Vlad Portnoy, who previously ran QuantPORT took a team to Cubist[36].

Conclusion

            For every poor performer, you have one that has excelled. For every “worst yearly performance”, you have career best months and years.

            An obvious prediction is the continued focus on short-term strategies. This push towards shorter term holding periods has been happening for a while. We are seeing hedge funds go intraday, with big groups hiring in this space. At the same time, HFT shops are pushing out of the ultra-high frequency space into the intraday range.

            Bitcoin is a space funds are starting to explore more. Paul Tudor already has Tudor Capital invested. BlackRock is ready to invest in Bitcoin futures. Some quant funds are looking at hiring here. Perhaps the fact that there are no real fundamentals to speak of and just technical factors, make it perfect for quant trading.

            A lot of new investment is expected given how a number of funds performed. AUM across the hedge fund space is set to rise. A reported one third of family offices are looking to allocate to hedge funds this year[37].

            The rise of multi-managers is set to continue. After showing the powers of diversification to have some of the lowest drawdowns, and the ability to deliver powerful performance means they can expect inflow. Hiring will probably be concentrated here as they need more strategies to deploy the capital on.

            There were some thrilled PM’s on percentage deals who are unlikely to be moving anytime soon. But moving is one good way to lock in future performance by moving with a guarantee. There are large groups with a lot of PnL to hire with, and we’ve seen some very senior moves already. Now we will see some big PM moves. PM’s are getting guaranteed $10m+ in comp in some cases.

            There will be some unhappy PM’s and sub-PM’s who are on discretionary pay-outs or netted platforms. These pay-outs rarely live up to expectation. The manager has one idea and the quant another. Given the performance some sub-PM’s have delivered; they will expect a hefty reward. But that doesn’t always translate unless it’s contractual. Sub-PM’s and PM’s generating over $10m in PnL should look for contractual deals.

            Researchers who have alpha generation experience but no track record should find themselves in demand. A first world problem the large funds have is not a lack of capital, but a lack of strategies to deploy said capital on. Anyone who can show signals and models that can generate $2-$5m PnL would be hired by teams; this amount covers your costs and adds value to a portfolio. Researchers generating more than $5m can find opportunities to step up into sub-PM roles.

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[1] https://www.businessinsider.com/credit-suisse-quant-fund-qt-closes-after-tough-stretch-quants-2020-5

[2] https://www.risk.net/risk-management/7672111/ronin-felled-prop-giant-shuts-up-shop

[3] https://www.bloomberg.com/news/articles/2020-05-14/jefferies-to-spin-out-quant-hedge-fund-with-some-staff-leaving

[4] https://www.efinancialcareers.co.uk/news/2020/04/quant-fund-layoffs-coronavirus?_ga=2.69961746.340947849.1611827800-815482974.1569332895

[5] https://www.ft.com/content/ff81d62b-7a56-43ae-998b-26f722245e72

[6] https://www.bloomberg.com/news/articles/2021-01-21/platt-s-bluecrest-gained-a-record-95-in-2020-amid-virus-chaos

[7] https://www.aurum.com/aurum-strategy-engine/

[8] https://www.aurum.com/hedge-fund-data/2020-where-does-it-sit-in-the-best-worst-months-of-hedge-fund-performance-in-the-past-decade/

[9] https://www.aurum.com/hedge-fund-data/hedge-fund-data-stories-2020/

[10] https://www.institutionalinvestor.com/article/b1q3fndg77d0tg/Renaissance-s-Medallion-Fund-Surged-76-in-2020-But-Funds-Open-to-Outsiders-Tanked

[11] https://www.bloomberg.com/news/articles/2020-12-30/human-run-hedge-funds-trounce-quants-in-year-defined-by-pandemic

[12] https://www.bloomberg.com/news/articles/2020-12-30/human-run-hedge-funds-trounce-quants-in-year-defined-by-pandemic

[13] https://www.ft.com/content/ff81d62b-7a56-43ae-998b-26f722245e72

[14] https://www.businessinsider.com/schonfeld-fundamental-fund-outperformed-quant-offering-performance-2021-1

[15] https://www.bloomberg.com/news/articles/2021-01-21/balyasny-boosts-ranks-of-money-managers-60-in-blockbuster-year

[16] https://www.aurum.com/hedge-fund-data/hedge-fund-data-stories-2020/

[17] https://www.institutionalinvestor.com/article/b1q48vjkrgzc1w/The-Main-Reason-Quants-Have-Performed-Badly-Value

[18] https://www.aurum.com/hedge-fund-data/hedge-fund-performance-by-strategy-latest-data/

[19] https://www.bloomberg.com/news/articles/2020-12-30/human-run-hedge-funds-trounce-quants-in-year-defined-by-pandemic

[20] https://www.bloomberg.com/opinion/articles/2021-01-08/which-hedge-funds-won-in-2020-howard-and-odey-show-ups-and-downs

[21] https://www.bloomberg.com/news/articles/2021-01-07/brevan-howard-s-main-hedge-fund-gains-27-in-best-year-on-record

[22] https://www.ft.com/content/25c3daa0-c394-471a-ae71-fc1d80e2ba29

[23] https://www.aurum.com/hedge-fund-data/hedge-fund-performance-by-strategy-latest-data/

[24] https://www.aurum.com/hedge-fund-data/2020-a-litmus-test-for-ctas/

[25] According to HSBC Investment Performance Review

[26] https://www.ft.com/content/33c190fe-dfb1-43c2-82eb-5396a986f342

[27] https://www.bloomberg.com/amp/news/articles/2020-10-26/hedge-fund-giants-lose-their-appeal-as-havens-in-global-turmoil

[28] https://www.hedgeweek.com/2020/10/30/291546/winners-and-losers-how-2020s-hedge-fund-performance-now-weighing-more-heavily

[29] https://www.bnnbloomberg.ca/gam-s-bet-on-hedge-fund-sours-as-quant-business-shrinks-1.1516442

[30] https://www.bloomberg.com/news/articles/2020-03-19/d-e-shaw-opens-hedge-fund-to-new-cash-with-markets-in-turmoil

[31] https://www.bloomberg.com/news/articles/2020-07-29/cohen-s-point72-closing-to-new-money-after-raising-10-billion

[32] https://www.bloomberg.com/news/articles/2020-08-27/millennium-returning-at-least-5-billion-to-investors-this-year

[33] https://www.cityam.com/man-group-lifted-by-strong-demand-for-alternative-funds/

[34] https://www.bloomberg.com/news/articles/2020-12-22/izzy-englander-s-hedge-fund-poised-for-biggest-gain-since-2000

[35] https://www.bloomberg.com/news/articles/2021-01-21/balyasny-boosts-ranks-of-money-managers-60-in-blockbuster-year

[36] https://www.greenstreet.com/news/hedge-fund-alert?breakdownId=50

[37] https://www.bloomberg.com/news/articles/2021-01-06/blackrock-says-world-s-super-rich-families-want-more-hedge-funds