The quantitative hedge fund industry is on the brink of surpassing $1tn of assets under management this year after breakneck growth from rising interest in more systematic, computer-powered investment strategies.
The amount of money managed by quant hedge funds tracked by HFR, a data provider, rose to more than $940bn by the end of October 2017 — nearly double the level of 2010 — and flows have continued to be strong in the fourth quarter, according to hedge fund executives.
An explosion of interest in automated, algorithmic investment approaches, ranging from the simple to high-octane strategies powered by artificial intelligence, has driven the surge. Even many traditional hedge funds are now hiring data scientists and programmers to reshape themselves into quants.
“Over the past decade the results of systematic quantitative investing have been undeniable,” said Philippe Jordan, president of CFM, a French quant hedge fund. “People have gone from being sceptical and uninterested to being artificial intelligence groupies.”
The growth of Two Sigma, one of the leaders of the quant hedge fund industry, is emblematic of the shift away from traditional hedge fund strategies. The New York-based firm’s assets have swelled from about $6bn in 2011 to more than $50bn in 2017, putting it roughly on par with the best-established quant powerhouses such as Renaissance Technologies and DE Shaw.
CFM’s assets under management nearly doubled last year to about $11bn, and the hedge fund has expanded its staff from about 160 at the start of last year to more than 200 today, according to Mr Jordan. He expects staffing to double over the next five years as more money pours into quantitative investing. Hedge fund executives say that the war for computer scientist talent has become intense.
Estimates for the size of the industry vary greatly because what constitutes a quant fund is debatable, especially now that many traditional hedge funds and even mutual fund groups are reinventing themselves as more computer-driven firms. However, Morgan Stanley’s analysts recently estimated that quant strategies — ranging from the newer breed of exchange traded funds to sophisticated hedge funds — have grown at 15 per cent annually over the past six years and control about $1.5tn.
But of this pile, they estimate that hedge funds only account for about $438bn, while quant mutual funds manage $712bn. Barclays analysts last summer estimated that quant hedge funds, or quant strategies within bigger hedge fund groups, managed about $500bn. Yet regardless of the overall size, analysts agree that it is the fastest-growing corner of the hedge fund industry.
That is worrying some fund managers, who fear that the money gushing into both simple and complex algorithmic trading strategies is making markets both more complex and fragile. The packaging of increasingly complex strategies into ETFs that are sold to retail investors is particularly alarming, according to analysts at 13D Research.
“When algorithms coexist in complex systems with the subjectivity and unpredictability of human behaviour, unforeseen and destabilising downsides result,” they wrote in a recent report. “They’re ignored, they intensify, until they become undeniable. We have little doubt the same will prove true for the algorithmic revolution in asset management.” - Financial Times (Robin Wigglesworth)