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Humans Beat Computers With Light Street Hedge Fund Gaining 44%

The environment that lifts stock pickers -- steady markets that enable their long-term trades -- is not so friendly to quants.

By Hema Parmar and Melissa Karsh

(Bloomberg) --The human stock pickers at hedge funds are leading the pack this year, while computer-run strategies pull up the rear. That’s no accident.

Traditional equity funds and quant vehicles tend to move in the opposite directions. The pattern is shown in results for the first nine months of 2017: the average equity fund was up 9.7 percent while quant pools rose only 0.6 percent, according to Hedge Fund Research.

The environment that lifts stock pickers -- steady markets that enable their long-term trades -- is not so friendly to quants. They do best in periods of volatility and dispersion, when their algorithms can find small price disparities to exploit. But the U.S. stock market has been unusually tranquil since last year’s presidential race. At an average level of 11.6 since Election Day, the CBOE Volatility Index has hovered about 40 percent below its lifetime average. 

“To a certain extent they are lowly correlated," Tim Ng, chief investment officer of Clearbrook Global Advisors, said of the two strategies. “The factors that drive positive returns in each are different, so what helps one doesn’t necessarily help another.” His firm invests in hedge funds.

Technology Standouts

Equity funds betting on technology have posted some of the biggest gains in the first three quarters. Light Street Capital Management’s Halogen fund, which focuses on technology, media and telecommunications stocks, soared 44 percent, said a person familiar with the matter. The flagship fund at Philippe Laffont’s tech-focused Coatue Management jumped almost 24 percent, according to an investor letter seen by Bloomberg News.

Computer-driven funds struggled to keep pace in the period. The main fund at Leda Braga’s Systematica Investments dropped almost 7 percent, another person said. The Diversified fund at $6.6 billion Aspect Capital fell 4.7 percent, according to an investor letter seen by Bloomberg News. Winton Group’s Futures fund is about flat on the year, according to a person with knowledge of the returns.

While the hedge fund industry’s overall performance is improving, it still lags behind the S&P 500 Index, which was up 14.2 percent with reinvested dividends this year through September. Funds across all strategies on average returned 4.3 percent on an asset-weighted basis in the period, compared with 0.7 percent in the first nine months of last year, according to Hedge Fund Research.

Defying Trends

Not all quants have had a bad year. The QIM Tactical Aggressive Fund gained 53 percent in the first nine months, according to a letter seen by Bloomberg. Nor have all traditional stock pickers done well. Crispin Odey, who is known for his bearish bets, saw his European equity fund sink 14 percent this year through Sept. 15 in its U.S. dollar share class.

Spokesmen for the firms declined to comment.

At times, traditional equity and quant strategies can both prosper. The last two months is such a period, as threats of war with North Korea and expectations of a Federal Reserve interest rate hike have spurred a rise in volatility.

“This has created an unusual environment where you have an uptick in the overall market, which helps long-term fundamental funds,” Ng said. “But there’s also enough volatility and dispersion within certain sectors, like energy and health care, so quants and algo managers can make money.”
--With assistance from Saijel Kishan and Suzy Waite.To contact the reporters on this story: Hema Parmar in New York at [email protected] ;Melissa Karsh in New York at [email protected] To contact the editors responsible for this story: Margaret Collins at [email protected] Vincent Bielski, Josh Friedman

TAGS: Equities
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