Investors are not the only ones recognizing the increasing dominance of computer-driven hedge funds, also known as quantitative funds. Investment firms themselves are also apparently eager to muscle their way into the strategy.
On Wednesday, London-based GAM agreed to shell out $217 million for a 40 percent stake in London-based Cantab Capital Partners, a so-called systematic commodity trading adviser (CTA) with $4 billion in assets under management. In making the announcement, GAM said the deal will enable it to launch a quantitative investing platform. At year-end, the firm had $23.1 billion in hedge fund assets, ranking it No. 21 on Alpha’s Hedge Fund 100 ranking of the world’s largest hedge fund firms.
GAM says it is the third-largest provider of liquid alternative Ucits funds and in the announcement said it will market Cantab’s funds through its distribution channel. The firm will also launch new Ucits products backed by Cantab’s technology. Ucits funds are retail-oriented hedge funds for European investors that are marketed to individuals who qualify as accredited investors. The funds are more regulated than typical hedge funds and are similar to the so-called ’40 Act liquid alternative hedge funds being marketed in the U.S. They typically have lower management fees than traditional, less-regulated hedge funds but charge roughly similar performance fees. The ’40 Act funds, however, are prohibited from charging performance fees altogether.
“We have been evaluating how best to enter the systematic space for the past 18 months because we believe it represents an important capability for an active investment firm in the current environment and in the decades to come,” states Alexander Friedman, group chief executive officer of GAM, in a press release. “The market turmoil following the UK referendum last week has only reinforced our determination to pursue, and deliver on, our strategy of diversification and long-term growth.”
Many systematic — or computer-driven — hedge funds are known as managed futures funds, or CTAs, which mostly trade futures contracts on a wide variety of financial instruments, especially commodities. CTAs are appealing to many investors as a niche way to hedge their portfolios, because the strategy has very little correlation to the stock market. Many CTAs are known as trend followers, specializing in either following short-term or longer-term movements in various markets. Other systematic managers more resemble macro hedge fund managers but use computers to trade traditional markets.
In a report that underscores the current appeal of CTAs, Société Générale Prime Services noted that 90 percent of the CTAs tracked by the firm posted positive returns on Friday, June 24, the first day the global equity markets sold off following the Brexit vote. In addition, 80 percent of short-term traders the firm tracks made money. On Monday, the second day the equity markets sank, 75 percent of the CTA programs and 70 percent of the short-term traders made money. After those two days, the SG CTA Index was up 2.81 percent year to date, while the SG Short Term Traders Index had gained 6.26 percent for the year.
Cantab was founded in 2006 by Ewan Kirk, named an Institutional Investor Hedge Fund Rising Star in 2009, and Erich Schlaikjer. Kirk ran Goldman Sachs’ quantitative strategies group in Europe and oversaw quantitative technology for the firm. Cantab runs models in more than 130 markets. In an interview a few years ago with managed futures specialist Altegris Advisors, Kirk said that unlike most CTAs, which rely on one dominating model, his firm relied on 20 models.
In making the announcement, GAM and Cantab boasted that Cantab’s CCP Quantitative program has posted a 7 percent net annualized return since its inception in 2007, while the CCP Core Macro program generated a better than 6 percent annualized gain since inception in 2013. The acquisition announcement also stresses that long-term correlations to traditional asset classes for both programs are low.
If you drill down into the performance numbers, the Cantab funds appear to be much more volatile than the typical CTA or systematic portfolio, however. Their wild swings in performance may not sit too well with the less-sophisticated, perhaps less-prepared investors to whom they may be marketed.
Yes, in January of this year when the global equity markets swooned, the CCP Quantitative Fund - Aristarchus program (a managed-futures fund) was one of the top performers, rising 8.4 percent for the month. This almost made up for the more than 8 percent loss it posted all of last year. The fund, however, has seesawed in the past, surging more than 39 percent in 2014 but plunging 27 percent the previous year.
“It seems like a good time for the acquisition,” says Peter Laurelli, vice president of research for hedge fund data specialist eVestment, in an e-mail exchange. “The current global environment appears more uncertain and unstable than in recent memory and investors will search for products that can operate effectively in this atmosphere,” Laurelli elaborates. He adds that the firm’s most recent annual Allocation & Consultant Survey indicated that global macro strategies would be in highest demand over the next three years.
“While there has been a redistribution of assets among larger macro funds in 2016, flows have recently turned positive,” Laurelli adds, noting just over $6 billion was allocated to macro funds in general in April and May, combined.
However, managed futures suffered net declines in flows in each of the past three months, turning negative in May for the first time since January.
