Aquantum, the managed futures start-up in Munich says its computer-driven investment strategy will differ in a sector becoming too large for the markets.
Computer-driven investment strategies proved their value in the disastrous markets of 2008, however since then many have become victims of their own success.
Returns of 14% that year from managed futures funds understandably fuelled great interest in the sector, as hedge funds fell 19% and shares plunged over 40%.
Allocators raided managed futures funds for cash that year due to their liquidity, leaving total assets flat despite the investment gains. But since then, assets have ballooned by 58% to $327bn, according to database Barclayhedge.
This was a mixed blessing. Funds that depleted in 2008-09 quickly replaced assets. Industry giant Winton Capital Management’s Futures Fund was Europe’s eighth most popular product last year, taking in $2.43bn to leave manager David Harding with about $27bn. Winton announced recently it would open an office in Zurich.
Meanwhile, the maths-driven (though not computer-driven) equities strategy at Invesco runs a sizeable $20bn. Old Mutual AM has also enjoyed success distributing its quant-based strategy, while German wealth managers Patriarch Multi-Manager, Artus Direct Invest and Donner und Reuschel (for its ‘Best Of’ manager concept) all use rules-based strategies to invest in funds.
Melissa Brown, senior director of applied research at analytical software provider Axioma, says: “Years ago ‘quant’ was pronounced dead, and as an asset class it did have a bad time, but it has maintained itself.”
Yet, as the computer-driven segment of ‘quant’ flourished since 2008, its popularity brought falling returns.
In the decade from 1980, it made on average 24.7% per year with total assets of below $10bn. By 1999, assets quadrupled to $41bn, and annual returns crumbled to 7.3%. By 2009, assets grew five-fold $214bn, and funds made just 5.9% a year. Since 2010 when they made 7.1%, they have struggled.
Moritz Seibert, co-founder of the nascent managed futures business of Aquantum AG in Munich, explains two effects of assets ballooning.
First, previously broadly diversified portfolios must narrow their focus to markets still deep enough to handle large trading volumes. In extremis, this may leave managers with meaningful exposure only to equities, fixed income and FX, while commodities “have to give way”.
Even smaller but interesting niches – emerging market FX, for example – are simply too shallow for juggernauts, and/or add insufficient value for their representation in portfolios to spend time in.
Secondly, as managers grow they tend to cut their funds’ target volatility – in some cases halving from nearly 20% historically to nearer 10% now – hence lower realised returns.
Aquantum is targeting annual risk (volatility) of 12% in its upcoming Ucits fund. Its founders could have set this higher, but reasoned that investors would prefer less price variation and reduced drawdowns “at a time that is still characterised by a high degree of uncertainty, due to the continuing sovereign debt crisis and on-going central bank interventions”.