Wermuth launches Russia and US quant funds into favourable climate

Germany’s Wermuth Asset Management has launched two quant funds, at a time one industry practitioner says the investing climate could favour maths-based approaches over stock picking for up to four years.

The Wiesbaden-headquartered manager already raised $22m for the strategies.

Some $2m is in its US-focused program, Wermuth Quant Long Short Equities Fund Global Strategy. The rest is in a strategy concentrating on Russia, Wermuth Quant Long Short Equities Fund Eastern Europe Strategy.

The Russia strategy made 56% in 2009 compared to 128.6% from the RTS index, with returns to July indicative based on advisory services made to other companies. Last year, it made 1% while RTS returned 22.5%. This year to September it was flat, whereas RTS fell 24.2%

According to Wermuth, the fund aims to provide a more risk-controlled method of accessing Russia’s market.

It has a correlation of 0.75 to RTS index. Industry figures from the group suggest this year to 4 October only 12 of 45 Russia-focused funds (hedge and traditional) beat the RTS index, and only Wermuth’s was in profit.

Wermuth’s US fund has a -0.42 correlation to the S&P 500 benchmark. Indicative performance, again based on advisory services to provided to other companies, showed 66% gains over the final three months of 2008. In 2009 it made 27.4%, followed by a 10.2% fall last year, and 15.9% rise this year by September.

Wermuth’s head of quant strategies Yuri Roslavlev (pictured) is based in Moscow, but will move to Wiesbaden for proximity to investors.

The Russian long-biased fund is already live. The US one is expected within two months. Each is run by computer, but humans can feed perameters into the system as necessary.

Last week the managing director of Axioma, which provides managers risk and portfolio optimisation software, said extreme correlation in equity markets particularly Europe’s, favoured quant approaches.

The climate could last for up to four years, mirroring quants’ ascendancy from 2003 to mid-2007, said Axioma’s Olivier d’Assier. European stock correlation sits at its second highest point since September 2000. Since March quants have been able to find driving factors with stable relationships.

Short-term trading funds are reviled by some investors for providing trading volume, not liquidity. They also attracted attention from some regulators this year.
But they saved investors in August by making 1.3%, according to Newedge, while the S&P 500 with dividends fell 5.4%, and European markets registered double-digit falls.

Wemuth’s Roslavlev said: “Having computers is a way of getting away from the emotions of trading, and computers can do things faster.” His models have a mixture of short-, medium- and long-term trend following modules, and mean reversion.

He said Russia’s stock market offers what the program thrives on – enough liquidity, strong trends and volatility. The fund is currently about 50% net long, and typically does not go net short.

Russia’s market can be very sentiment-driven, he added, and it is heavily held by foreign investors who could enter or leave rapidly. Wermuth’s computers can position the fund long or short more quickly, to take advantage of an accelerating price trend either way.

Roslavlev said markets guided by emotions did not suit statistical arbitrage approaches, as the mean reversion they depend upon often does not work.

The US fund is more concentrated on mid-caps and growth stocks, where steadier trends can be evident, than among blue chips whose prices can be choppy, but end up going nowhere overall – conditions model-driven portfolios typically dislike.

When each fund reaches $100m, Wermuth will look at expending their remits – the Russian one towards central Asia and countries like Turkey, the US one to take a more global focus.

Roslavlev added various trading costs were cheaper in Moscow than London, and there is no stamp duty. Such costs can detract significantly from returns of some computer-driven funds, especially if they trade frequently.

Roslavlev said the average holding period of the Russian fund was between two days and one year. The US fund, which can invest in shares and ETFs and ETCs, is more aggressive with an average holding period of about two days.


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