Quant Trading Market Update 2020

An overview of recent developments and hiring trends in the Quant Trading market. (10min read)

Hedge fund industry is around 7% down.

Quant funds are on average 14% down.

Trend-followers overall are up 1 to 2%.

Systematic macro is 10% down.

Market Neutral is around 8% down.

Multi-strategy funds are 0 to 2% positive 

The recent market turmoil has seen the buy side quant trading world hit hard on multiple fronts, with funds losses hitting 50% in some extremes. Estimates are that quantitative hedge funds have halved the size of their positions through March, lowering their GMV, and that the average quant fund has lost 14 % this year. 

Higher frequency traders have enjoyed an excellent time. Algo desks at banks are registering record volumes as investors have needed to sell and then buy the dip. In the same vein, the big, non-bank prop HFT market makers have also had an outstanding time. There are reports of electronic market makers that have had a profitable time making over USD 10m a day. 

The big multi-strat multi-manager platforms showed powers of diversification with overall flat to positive performance. From the outside, with returns nearing a couple of percentage points up, things look great. However, taking a closer look, this neglects to highlight the vastly varying performance of individual teams. Multiple teams have been let go as the powers at be showed their strict risk management side. A key statement that candidates will put forward is the counterfactual claim that, had they stayed, their performance would have rebounded by month end. It would be advisable for PM’s to show some proof of this when interviewing. 

Statistical arbitrage was one of the worst hit, losing 15%-20% on average, with some going 25% under. The pioneers of stat-arb got caught out for the first time in a long time, with the top 3 quant funds down for the year across their main stat-arb funds. One thing to note, while they were down on the public funds, their real performance is hiding in the internal private funds. It would fascinate some to compare the difference, but data for these is hard to get. (Update: That has now been answered ). That said, the public performance sets a worrying trend for the space if the best failed. A couple stat-arb groups did do well though, mostly in their response to the events. When the models started to lose control, certain groups switched to cash a lot sooner than others, avoiding the hit.

Systematic macro funds have been hit hard; they are down 10% on average. The market showed it did not care for past performance here. One of the best performers of 2019, with 70% returns, got brought back down to earth with a bump, losing 30% YTD in 2020. The overall trend in systematic macro is not surprising given their exposure and typical trading horizons. Even some of the largest and most famous macro funds admitted to getting it very wrong. There is divergence in asset class performance, as systematic commodity focused funds appears to have done well according to some reports, up 20%. Those with strategies trading 5 to 10 days on any asset performed best through this period.

Trend following strategies across managed futures have seen a 1 to 2% gain. That gain covers up an enormous variety of performance within the CTA space. At the bottom end, there are groups that are 10-20% down. While at the top end, groups are nearly 20% up through the quarter. Some did what they were designed to do, spot the trend and ride it. Others, who left their trend following roots, got punished. While the 1 to 2% gain looks like decent performance relative to other strategies, when compared to 2008 where they made 17/18%, they haven’t performed well so far this year.

Performance became more much varied across the groups and styles as the month wore on. The first two weeks of March hit everyone and yet by the end of the month a good number of groups pulled the performance back, while others kept losing. There are some notable examples of who turned losing positions mid-March into winners by the end of the month. This turn around meant that while there were big drawdowns, they do not appear to be record drawdowns. With most threatened with big drawdowns in the middle of the month, it appears they got lucky in not breaking their own drawdown records. 

What is happening across hiring?

Client Side  

At least one firm has gone under, another shuttered its funds, and another two had their funding pulled. Sadly, more are expected to close, or downsize. There have already been teams and individuals let go, and I expect more to be let go in the coming weeks. This will lead to an increase in the candidate pool increasing competition for jobs. 

While many roles have been frozen, the remaining active jobs spilt into two categories; mission critical or expansionary. The mission critical are specific required mandates, such as a quant developer or someone in risk management. Expansionary ones are at groups that succeeded and seeking to capitalize. Despite fewer positions, remaining ones are more interesting due to their importance to the current business or future growth. 

There are quant funds which see this as an opportunity to capture market share and attract new top talent. They performed well and want to expand by hiring talent. Increasing the number of opportunities for high performing PM’s and Quant Traders who may have felt it was too risky or costly to move previously.

Despite hiring freezes, others are still willing to interview and hire. New offers and contracts being released last week at a few groups. Interviews are now being conducted via phone or videoconference, which is nothing new to the quant industry. However, there are still do’s and don’ts on VC calls that many would do well to remember. 

Quant Funds are happy to on-board people remotely if it came to that. They are doing it for those that were due to start, with only a small number having their start dates pushed back. Start dates are being made flexible on offers, and they stipulate no requirement for resignation. We all hope the lockdown doesn’t last long, but with notice periods and non-competes, starting your new job from home is unlikely. Nonetheless, it is reassuring to know contingency plans are there for those worried about resigning. 

Candidate side

Firstly, regarding the drawdown, candidates may worry that they have ruined their track record. However, when everyone has been hit by a black swan event, it doesn’t matter that there is a drawdown, what matters is how you handled it and the actions you took. Funds will seek clarity on this during interviews. 

Portfolio Managers and senior quant researchers are seeing this as a good time to move. Risk has been cut as groups deleverage; it means making up the losses this year will be very difficult. Therefore, some see it as a good time to step out of trading and come back in 6 months’ time on a superior platform, in an upgraded role. 

On the other side, naturally people are worrying about making a move in this environment, often quoting the “last in, first out” principle and we’ve had an offer rejected based on job security recently. This is definitely true, and it is right to acknowledge. However, it also depends on who you are and where you are going. Joining a strong platform which is looking to expand could be a lot less risky than sticking with what you have. Most candidates are resigning despite the market conditions after careful consideration. 

Working from home is a new world to most people. Many always had the ability to work from home, though typically just one day a week. So while switching to full time remote from home is entirely possible for quant traders, it has proven difficult for many other reasons. Several polls suggest around half of people struggled with the change, while only a quarter say it is great. While it has cut commutes, it has replaced with increased working. People replaced a high pressured environment with a child filled one. Some miss the lack of intellectual stimulation colleagues bring, while others thrive in the introverted world of being at home. Therefore, the long term psychological impact, not just the productivity impact, are key things hedge funds are monitoring the longer this goes on. 

Looking ahead - What can we expect?

A big area of change will be the work and lifestyle balance, coupled with general working habits. Never before have entire offices worked remotely. Many would not think it was possible or realistic. Hedge Funds worried if it was structurally possible, but so far reports are positive. No break downs in trading, no security issues, etc. As people get used to this way of working, they might see advantages to it. The flexibility of logging in and out when it suits will be attractive to many. Remote working tended to be reserved for smaller groups, for senior portfolio managers. In the future, it may become a requirement. 

The next shock on the horizon this quarter is in the economic data. Large US banks have already shown their results from the first three months of this year. Huge increases in trading revenue are offset by large drops in other areas like M&A. Trading will stay volatile when more companies release their data. This is unlikely to impact quant hedge funds directly, but will impact strategies. Data is going to be vital in an ever changing fluid corporate landscape. Alternative data will be needed to assess the impact of COVID-19. Those with the best data will outperform those lacking alternative data and expertise to utilise it. 

An interesting discussion is if there will be a shift of AUM between active and passive investing. This is across the wider market, not just quant funds. For years, the rise of passive investing has eaten away at many funds who struggled to justify their fees against performance. The ability of active managers to mitigate the risk and turn a profit now, could prove a welcome justification for a return to active management over the passive investing. 

Capital base is often overlooked, but should be a consideration for candidates. With redemptions coming, those whose AUM that is; tied up in long-term capital, like a big established platform, or is mostly/all prop money will not worry about redemptions and are safe. Other houses will not be lucky and will get hit hard by redemptions. We have seen many times that once groups bleed AUM, it is difficult to stop. For groups who had big redemptions in the last year or two and poor performance, the writing is on the wall. Thus, it is wise to consider the capital base in deciding the strength of your current firm, or a prospective one.

Redemptions have started, and will doubtless come thick and fast in the next few months. The hedge fund industry was already facing net outflows for 5 years and so given the performance of many, this will increase. The shift from passive to active may offset some. Any money kept in will go to the usual big players and the ones that did well. Much like 2008, the bottom of the industry under $500m will struggle, with many closing. Besides the smaller groups, there may be some big falls from grace in and around the top ten of quant funds.  

Redemptions will pull a lot of money out, however, they will reinvest a lot. This will create a dramatic shift in AUM within quantitative trading. Small groups or mid-tier groups that did well will attract that AUM. These can be attractive propositions to portfolio managers and quant traders who will get more greenfield space internally. Those outside the top ten will get big boosts to challenge the established top with both new AUM and new Portfolio Managers. New challengers represent a very interesting group to move to.

The shift across quant funds will also centre around strategies. For example, quant multi-factor with 1 to 3 month horizons is not looking attractive to any of my clients right now. In theory, it would look the same to their clients, the big distribution groups. Before the outbreak, quantamental was on the rise. It’s holding periods may mean this is paused for a while. But the principle of blending quantitative and fundamental approaches might gain better traction now. Quant groups that used more discretion and stopped trading did best. This could lead to an attempt to include more discretion into the investment process.

Short-term trading strategies across equities and/or futures are in vogue. The majority of funds wanted these before the crash, and that has only solidified desire. Quantitative hedge funds want intraday out to 5-day holding periods and Sharpe ratios above 2. They will consider those with up to 10-day average holding periods, but only if you’ve done well this year. Anything beyond that time frame carries too much risk and doesn’t have the performance they desire. 

Those on the shorter term end, holding intraday to 10-days, recalibrated their models, switching to shorting, volatility or more defensive strategies. This meant they were able to make up most of their losses and even profit. If you are a short term PM, sub-PM or quant trader, you are valuable; if you’ve done well, you’re highly valuable, and it might be time to trade that value in. 

Seeding groups have had a mixed performance individually, it has hit one hard. That doesn’t carry for all seeders, as a few are interested in adding value. Teams coming out of the big groups may have been let go on based on strict risk limits, but that doesn’t mean the strategy was inherently bad. Other teams are unhappy as a result of a substantial risk reduction, so are looking to get seeded and set up as an independent fund. These seeding funds are ready to seize any potential talent, and they started a lot of funds in 2009 just like this. 

Many struggled, some did well, and others did exceptionally. This has led to an interesting and great disruption to the quant space. Not only has it created volatility in the financial market, but that volatility will reverberate through the industry behind the scenes. AUM will get pulled and given to those who performed best. Teams will be let go, people will move, new funds will form. The top ten will change. They will alter strategies, hiring processes will change, growth will get reconsidered. Some will rise, some will fall. The question is, are you in the best spot for you?

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