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December 2, 2012 3:57 am
Trend-following quantitative “black-box” hedge funds are accounting for their highest-ever proportion of hedge fund start-ups, despite weak returns since the financial crisis.
A record 187 quant, or algorithmic funds, launched last year and account for 12 per cent of all hedge fund start-ups, another record, according to Preqin, a data provider whose figures go back to 2000.
Preqin said it expected this year’s tally to be higher still; launches in the first quarter of 2012 were up 40 per cent from last year and it has recorded 95 quant fund start-ups in total so far this year, even though its data typically lags by six to nine months.
“We expect 2012 numbers [on algorithmic fund launches] to exceed those of 2011,” said Amy Bensted, head of hedge funds at Preqin.
Andrew Rubio, chief executive of Throgmorton, a mid- and back-office service provider to hedge funds, said: “The new start-ups tend to be algorithmic, putting their faith in the black-box model. Algo trading seems to be the flavour of the month again, not just in Switzerland but in the US and the UK too.”
One of the factors triggering the growth of quantitative strategies is a flood of former investment bank proprietary traders keen to set up their own hedge funds. However, Ken Heinz, president of Chicago-based Hedge Fund Research, said investors were also looking for strategies with low volatility and high liquidity with exposure to currency and commodity markets.
Institutional investors looking for small pockets of potential market outperformance are also buying algorithmic funds, added Mr Rubio.
The trend comes as quantitative fund managers face up to one of their worst years on record with some of the biggest names such as Winton Capital, the world’s largest quant fund house, BlueTrend, Aspect Capital, Man Group, Highbridge and Renaissance Technologies seeing flagship funds make losses.
The average systematic fund has lost 3.2 per cent so far this year, while the average hedge fund has made 4.5 per cent, according to data from HFR.
However, this year’s poor performance figures are unlikely to act as a deterrent to hedge fund start-ups, particularly by those whose previous expertise as bank prop desk traders was in algorithmic trading, said Bill Stone, founder and chief executive of SS&C Technologies, a specialist software provider to hedge funds.
These approaches “go round and round. Interest rates have been steady in the past few years so these models can pick up relatively small changes in markets and pocket the difference,” Mr Stone said.
Within the quant sector, the most active strategies are credit funds and managed futures vehicles, known as commodity trading advisors, which look for nascent trends to ride in the liquid futures markets, Mr Stone added.
Jerome de Lavenere Lussan, a managing partner at Laven Partners, a consultancy, said there was much talk of new systematic programmes and seeding activity for quant hedge funds but also “much caution about poor CTA performance”.
The average CTA has lost more than 7 per cent in the past two years, says HFR.
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