This document is being provided for the exclusive use of
06.19.12 www.bloombergbriefs.com Bloomberg Brief | Hedge Funds 12
SPOTLIGHT
QuantZ Capital’s Milind Sharma on Applying a ‘Macro Overlay’ to Quantitative Investing
a slow, gradual thing? in the higher order effects, namely what Milind Sharma, CEO of New York-based A: We’re really betting on the second does that do to vol and dispersion and QuantZ Capital Management Ltd., spoke order effects. Regardless of whether you stock correlation and all those things. to Bloomberg’s Nathaniel Baker about his have the big event or not, it’s going to be The macro stuff translates directly into views on the global macro picture and how a big unwind because there’s no ways to the fact that in the last couple of years these are incorporated into his hedge fund’s you’ve seen record high stock correla- strategy. get rid of the debt instantaneously. The real issue near term is whether Angela tion. That makes it very difficult for a Merkel and Europe can take a page fundamental, bottom-up stock picker to Q: Your fund was in the top 3 percent in out of our history book from Alexander outperform. The other issue is that when the Bloomberg database last year and Hamilton’s experience and apply it to Eu- you’re in a sideways to downward bear recently won the Battle of the Quants. rope. Even if they do, it’s difficult to see market, the typical long/short process What’s the strategy, exactly? how the world can magically heal itself. doesn’t work well. Because most long/ short funds are essentially levered beta A: We’re ‘quantamental,’ which means Because we’re still looking at a potential riders. They see a rally, they load up and a hybrid of quantitative-driven on the hard-landing scenario in China, India’s jump on. Not to mention that with the securities selection side with some macro not in great shape with inflation, the pressure on expert networks and Reg adjustment/macro overlay, if you will. Japanese have plenty of their own debt to worry about and are only 23 years into FD it’s gotten much harder for many of these managers to do what they used Q: Quantamental. I like that. How does their bear market, and we’re 13 years into to do. Plus, with the relative volume in the macro overlay work? ours. We see the ‘lost decade’ in stocks – not the one that just happened, but ETFs rising dramatically, you’ve got an A: It’s taking our house view and the one that’s likely to come – to act like environment where a process-driven combining it with a regime-switching ap- a dampened oscillator. This means that strategy can tweak the right levers to proach. Basically forecasting probabili- each successive episode of quantitative take advantage of these issues. ties, which then drive the portfolio tilt easing will be less and less effective. As and overall portfolio orientation. There’s an example, this is the third year in a row Q: Isn’t there a lot of upwards/down- a lot of moving parts. that we’ve seen a very serious déjà-vu wards/sideways movement as we go script playing out; you get a very strong along here? Q: So what are your macro views then? first quarter, market peaks in April or A: Exactly. In general, one should expect A: We sound like a broken record in May, then you get a summer swoon. For much higher volatility and correlation in terms of our perma-bearish outlook but the third year in a row we’ve been justi- these bear market cycles. That’s some- that’s because frankly we see either a fied in being cautious that once the sugar thing a quant process can take advantage ‘checkmate’ or a ‘stalemate.’ We don’t high of quantitative easing wears off, the of. We for instance are always implicitly see any great scenarios that can come same script plays out. What I’m saying is long vol/long dispersion. But we can out of this massive deleveraging cycle. that at some point you’re going to have choose to be long correlation/short cor- We’re in the camp of this being a great an episode of QE perceived not as a relation by tweaking our ratio bets on stagnation/deflationary bust or secular license to melt up, but as sheer despera- idiosyncratic versus common factor risk. bear market. tion on part of the Fed. Q: I think you just lost me. Q: What are your big concerns? It Q: How are these views translated into A: It’s very difficult for fundamental man- sounds like this goes beyond Greece your strategy exactly? How does that agers to even measure their idiosyncratic and European sovereign debt? mechanism work? versus common factor levels, much less A: That’s right. All of the above plus of A: As I mentioned we’re more interested take advantage of that. course the domestic issues: your fiscal cliff, the $46 trillion of unfunded liabilities, trying to solve the debt overhang with more debt and the possibility of a disor- Age: 40 derly default or disorderly decline in one of the major reserve currencies. At the College/University/Grad School(s): Oxford, Vassar, Carnegie Mellon, Wharton end of the day, we believe that enough Professional Background: MLIM, ran proprietary stat arb portfolios at RBC cans have been kicked down enough roads in enough countries that some- and Deutsche Bank AG, the latter under Boaz Weinstein. thing’s got to give at some point soon. Mentors: Boaz Weinstein; Bob Doll, vice chairman of BlackRock.
Q: Will this be a big event or more like Charitable Work: Ti Kay Haiti (www.tikayhaiti.org)
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“QuantZ - Winner of the Best Quant fund award at the Battle of the Quants 2012”
Global Markets Summit 2012 & Markets Choice Awards 2013
The Secret Triumph of Quants October 18, 2012 By Irwin Speizer
Equity market-neutral funds have found a path to modest profit in the past two years, but managers running the strategy in quantitative mode have been more impressive performers, posting double-digit returns. Funds plying an equity market-neutral strategy place long and short bets in a balanced way that exploits mispricings while avoiding correlation with overall markets. The quant strategists, however, have been particularly good at navigating choppy markets, thanks to algorithms that detect changes, even minute ones, in value, momentum and other broad factors.
After several difficult years, equity market-neutral funds overall showed positive results last year and to-date this year. The sector had a rough September, however. The Dow Jones Credit Suisse AllHedge Index pegs the sector up 4.33 percent year-to-date through September, on a par with the Dow Jones Credit Suisse AllHedge Index, which rose 4.621 percent for the same period.
What the market-neutral index may be obscuring is the quantitative version within the strategy. Among the index-beating quant funds are Boston-based Acadian Asset Management’s$58Mark million Global Leveraged et Neutral Fund, up 15.2 percent in 2012 through August after rising 18.1 percent last year, according to people familiar the Capital Management’sand Quarkfund, QuantZ with MarketEquity Neutral Fund in New York, up about 6 percent for the year through early October, according to sources, after posting a 13.82 percent gain last year.
Yet despite strong performance, investors have not paid much attention to the strategy. Alexandre Voitenok, a senior vice president and director of long-short strategies at Acadian, says that in surveys investors in both Europe and the U.S. have for the most part said their interest was neutral, as opposed to rising or falling. He has, however, just begun to get more calls from European fund-of- funds managers in the past few months. Investors may be reluctant due to a lingering hangover. Quants had a poor year in 2009, and before that they suffered from doube-digit losses in 2007, when many quant funds were so over-leveraged that a downward market trend set off a chain reaction of forced selling. Many investors now want to see two years or more of good performance before they commit. according to investors familiar with the strategy.
What’s in ofpeoplefavor is working the the say awith funds, winners, familiar reliance on effective and constantly updated models that tend to stress analysis on broad factors like value or momentum rather than focusing more on fundamental stock picking.
Acadian monitors 40,000 companies worldwide, using factor models and carefully monitored timing of plays. We diversify not only by having a multifactor approachalsothinking different by time butVoitenok. about says horizons,
The QuantZ fund owns about 800 stocks at a time and uses computer models to analyze and predict macro economic trends. If we can anticipate when it is risk on and when it is risk off by virtue of getting the macro probability right, we can make money by being tilted the right way, even if there are other headwinds, says Milind Sharma, CEO of QuantZ.
Cerebellum Capital in San Francisco takes a somewhat different approach in its $80 million ATM Fund. We have identified a particular form of quant arbitrage that if carefully deployed, can generate modest returns with very low risk, says Conrad Gann, Cerebellum’s chief operating officer. The fund has not had a down month since its launch in December 2009. This document is being provided for the exclusive use of
05.08.12 www.bloombergbriefs.com Bloomberg Brief | Hedge Funds 7
MARKET CALLS Items may be submitted to [email protected] for consideration
Distressed Mortgage Bonds Attractive: Canyon’s Friedman Securities that are “much more complex and much more distressed” than higher-rated MARKET CALLS, corporate bonds, such as those backed by residential mortgages, offer greater returns REVISITED with less risk, according to Canyon Partners LLC’s Joshua Friedman. The bonds “provide a great deal more downside protection” because government QuantZ Capital Management policies aimed at keeping borrowers in their homes with loan modifications means the LLC predicted “the market’s securities can still produce gains even if the principal is cut or home prices drop, Fried- summer of discontent” last man, based in Los Angeles, said in an interview with Willow Bay on Bloomberg Televi- June. “The grim reality of a sion’s “Bottom Line.” growth scare/ double dip is “If you own securities at 30 or 35 cents on the dollar, and even if principle is cut quite setting in,” the firm wrote in substantially, or even if home prices drop quite substantially, you still have a very robust its monthly letter to investors return,” Friedman said. dated June 3. “We have trouble —Charles Mead and Willow Bay seeing fundamental/ macro support for equities to continue to extend the tremendous gains Einhorn Sees ‘Fed Put’ Under Bonds, Not Stocks seen post-2009 lows.” QuantZ said it expected volatility to Federal Reserve policy isn’t designed to prop up U.S. stock prices as many people rise and “remain elevated given believe, according to David Einhorn, president of Greenlight Capital LLC. the macro state of the world” “The real Fed put is under the bond market,” the hedge-fund manager wrote in a com- (Bloomberg Brief: Hedge funds, mentary May 3 on the Huffington Post website. “The Fed has all but guaranteed that it will June 7, 2011). do what it takes to stop bond prices from falling” by promising to keep its target interest – After climbing close to 1363 in rate near zero through 2014, according to Einhorn, based in New York. early July, the S&P 500 fell by Central bankers don’t understand investor psychology, Einhorn wrote. “If you want to get almost 18 percent in one month, people to sell bonds and buy stocks, the best way to do that is to show them that bond dropping to 1119 on August 8. The prices can, and do, fall.” “summer of discontent” continued —David Wilson much as QuantZ had predicted, with high levels of volatility and the S&P sinking to a low of 1099 Election Results No Reason to Add to Europe Shorts: Biggs on Oct. 3 (see chart below). Barton Biggs, founder of Traxis Partners LP, said he isn’t adding to bearish equity Volatility would remain elevated bets in Europe after elections in France and Greece this weekend signal voters are seek- too, judging by the Chicago Board ing leaders who support more stimulus. Options Exchange Volatility Index, Biggs said on Bloomberg Television’s “In the Loop” with Betty Liu yesterday that he which stayed above its 200 day continues to short German and French benchmark equity indexes. The region’s shared moving average until early Decem- currency is “50/50 on surviving,” Biggs said. ber. Voters are “signaling to their politicians that they want more stimulus and less austerity,” Since Dec. 7, the VIX has trend- Biggs said. “If they don’t get it, they’re going to vote in new leaders. That’s a big deal and I ed downward and last week was happen to think stimulus combined with reforms is the way to go.” less than half its level from last The U.S. economy is “still cranking along at 2.5 percent real gross domestic product summer. U.S. equities have rallied growth,” he said. “That’s a good healthy level.” as well: From Dec. 19 to April 2, —Inyoung Hwang and Betty Liu the S&P 500 increased by 17 per- cent. Fears of a “double dip” have, so far at least, been unfounded. New Credit Fund MeehanCombs Likes European Debt – Nathaniel E. Baker
MeehanCombs LP, the newly-formed credit fund, sees long opportunities in various 1500 50 types of European debt by early 2013, according to Matt Meehan, co-founder, chief 1450 45 1400 40 investment officer and portfolio manager of the Greenwich, Connecticut-based firm. 1350 “One has to keep their eyes open across the credit spectrum: senior bank debt, fallen 1300 35 VIX
angels, busted converts, munis and asset backed,” Meehan said. “That usually allows us 1250 30 S&P 500 500 S&P 1200 25 to find something positive to do both long and short at all times.” 1150 20 Eli Combs, co-founder and president of the firm, said geographic diversification is es- 1100 SPX Index 1050 15 sential. “This is not the time to be a one trick pony -- portfolios that are only focused on VIX Index 1000 10 Europe, as well as portfolios that are long-only in credit, will likely have significant chal- 4/1/11 7/1/11 10/1/11 1/1/12 4/1/12 lenges navigating the coming volatility,” Combs said. Source: Bloomberg —Kelly Bit
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FINalternatives
Published on FINalternatives (http://www.finalternatives.com) QuantZ Adds 3.9% In Oct., Up 16.45% YTD
Nov 10 2011 | 9:58am ET
QuantZ Capital Management hasn‘t lost a step this year as it pushes towards 2012 up by double-digits.
While many of its peers have suffered some nauseating ups-and-downs over the past several months, QuantZ's Quark Equity Market Neutral Fund has been a paragon of consistency, rising 2.46% in August, 2.5% in September and 3.91% in October, leaving the fund up 16.45% on the year.
"We have reason to believe that, regardless of any year-end seasonal relief rallies, most traditional and hedge fund strategies are likely to disappoint in the decade to come," QuantZ wrote, citing continuing troubles in Europe and the U.S. deadlock on deficit reduction. And, citing several recent studies showing that women make better risk managers, the firm unveiled a new motto, of sorts: "No cowboy acts. Trade like a girl."
QuantZ has had only two down months all year, January and July.
Source URL: http://www.finalternatives.com/node/18704
FINalternatives
Published on FINalternatives (http://www.finalternatives.com)
JAT, Citadel, QuantZ Among Top Hedge Funds In '11
Oct 5 2011 | 1:05pm ET
A pair of prominent hedge funds are among the best-performers of the year with just three months to go in 2011.
JAT Capital Management and Citadel Invest Group are both up by double-digits this year, according to published reports. The former may be the best of all, having returned 37.4% through Sept. 23.
JAT, which has recently closed its fund to new investors, was up 1.8% with a week to go in September.
Citadel had more modest monthly and year-to-date returns, but impressive nonetheless. The Chicago hedge fund giant's flagship Kensington and Wellington funds rose 0.25% last month, buoyed by their global equities strategy, which rose 2.35% on the month. The two funds are now up 15.1% on the year, Institutional Investor reports.
Also up double-digits this year is QuantZ Capital Management's Quark Equity Market Neutral Fund, which rose 2.5% in September and is up 11.85%.
Others were not so lucky: Greenlight Capital added 0.2% on the month. But neither that gain– nor the fact that Greenlight was up, marginally, in the third quarter–can distract from the firm's 5.1% year-to-date loss.
Source URL: http://www.finalternatives.com/node/18293
Goldman to Close Global Alpha Fund After Losses
GOLDMAN SACHS FUNDS STOCK MARKETS EQUITIES FINANCIAL CRISIS RECESSION SAFE HAVENS INVESTORS BANKING CNBC.com | 16 Sep 2011 | 03:21 AM ET
Goldman Sachs Group is shuttering a well-known hedge fund that relies on computer-driven trading strategies after the portfolio rang up a hefty loss this year.
Goldman told investors in the roughly $1.6 billion Global Alpha fund the news on Thursday, one day after it announced a management shake-up at the fund that had been the crown jewel of its quantitative trading business.
The fund will be closed in the next few weeks.
Global Alpha had tumbled 13 percent by early September, delivering a far worse performance than other hedge funds that rely on computer programs to quickly take advantage of opportunities in the market, people familiar with the number said.
These types of funds are supposed to move quickly in and out of stocks, bonds, currencies and other assets and exit positions before losses accrue.
This is the second time in four years the Global Alpha fund — once one of Goldman's biggest with $12 billion in assets — has suffered big losses and its performance raises questions about the ability of Goldman Sachs to manage quantitative strategies for its wealthy clients.
In fact, people familiar with Goldman Sachs have said the company's decision to liquidate Global Alpha signals its decision to exit quantitative hedge fund strategies altogether.
The firm still manages billions in quantitative mutual funds. Goldman Sachs declined to comment.
Even though Goldman's Global Alpha fund is in the red, most other other quantitative hedge funds are up or are flat for the year.
The average quant fund is down less than 1 percent over that period, according to performance tracking service Hedge Fund Research Inc.
Mark Carhart, the man who managed the Global Alpha fund with Raymond Iwanowski for more than a decade until 2009, has gained 7 percent net of fees this year at his new hedge fund Kepos Capital, a person familiar with his numbers said. The new turmoil at Global Alpha comes almost four years to the day after the fund lost 22.5 percent in August 2007, during the early days of the financial crisis.
Those losses prompted investors to pull money out.
Even though the fund's performance steadied with a 4 percent gain in 2008 and raced ahead with a 30 percent increase in 2009, assets never recovered.
By the time Carhart and Iwanowski left in 2009, the fund had shrunk to $4 billion from its $12 billion peak.
Soon after the pair retired, assets shriveled further to about $2 billion. The fund neither gained nor lost money last year, delivering a zero return. The quantitative group has been beset by departures for some time.
More than two dozen left this year alone, people familiar with the numbers said.
On Wednesday, Goldman Sachs Asset Management sent a letter to Global Alpha investors notifying them that Katinka Domotorffy, the head of the group's quantitative investment strategies, would retire at year's end.
The letter, a copy of which was obtained by Reuters, did not discuss the poor performance of the Global Alpha fund.
Deja Vu Again
What may have hit the Goldman fund especially hard were the unexpected stock market sell offs in early August and recent currency market fluctuations in the wake of the Swiss National Bank's decision to halt the rise of the Swiss franc, people familiar with the fund's models said.
Andrew Schneider, president and CEO of Global Hedge Fund Advisors, said the first half of September has been brutal for some large hedge funds, due to unpredictable moves in market direction.
"The volatility has been so high; if you're wrong, especially if you're using margin or leverage, your returns are going to be extremely poor," said Schneider.
Other quantitative hedge funds, however, fared better.
James Simons' Renaissance Technologies' Renaissance Institutional Equities fund has gained more than 25 percent this year, said a person familiar with the fund run by the math professor turned hedge fund manager.
Another quant fund, QuantZ Capital Management, for instance, is up 12.8 percent through Sept. 6, according to a letter sent to investors.
© 2011 CNBC.com
URL: http://www.cnbc.com/id/44545789/ 10.25.11 HEDGE FUNDS | Bloomberg Brief 2
RETURNS IN BRIEF
■ Fortress Investment Group LLC’s Commodities Fund LP was down 5 basis points Hedge Fund Returns in September, according to a letter to investors obtained by Bloomberg. “Gains were Bloomberg BAIF indices, which represent all funds made primarily in short metals and energy positions, offset by losses incurred in our tracked by Bloomberg data, are the source of the long gold and corn positions,” William Callanan, the fund’s chief investment officer, below hedge fund and fund of funds data. wrote in the letter. Hedge Funds Funds of Funds S&P 500 2-Year Treasuries 15.06% (Merrill Lynch Total Return Index) ■ Tiburon Holdings LLC, the New York-based event-driven fund that has $50 mil- lion in assets, has gained 4 percent this year, according to a person familiar with the 8.18% matter. The fund is run by Peter Lupoff, a former portfolio manager at Millennium
Partners LP. Tiburon started in November 2009. 3.90%* 2.47% 1.36% ■ MAST Capital Management LLC’s Credit Opportunities I fund returned 1.7 per- -8.68% cent in September, its fifth straight month of positive returns, to bring year-to-date -0.89% -1.03% 2010 total returns performance to 6.64 percent, according to a letter to investors that was obtained by 2011 YTD total returns
Bloomberg. Gains in the fund’s long CDS book, “as well as both special situation *from Feb. 26, 2010 single name bond and equity shorts,” drove gains, the letter said. The fund is man- aged by David Steinberg. Bloomberg Brief Hedge Funds ■ QuantZ Capital Management’s Quark Equity Market Neutral Fund gained 4.7 per- Newsletter Ted Merz cent through Oct. 17, bringing year-to-date returns to 17 percent, according to a letter Executive Editor [email protected] to investors, a copy of which was obtained by Bloomberg. The New York-based fund is 212-617-2309 managed by Milind Sharma. Bloomberg News Rob Urban —Compiled by Kelly Bit and Nathaniel E. Baker Managing Editor [email protected] 212-617-5192 Hedge Funds Nathaniel E. Baker For this week’s Performance Snapshot, featuring distressed hedge funds, see page 10. Editors [email protected] 212-617-2741 RETURNS BY STRATEGY Melissa Karsh [email protected] STRATEGY 2010 SEPTEMBER 2011 2011 YEAR-TO-DATE 212-617-4557
Mortgage-Backed Arbitrage 24.6 -0.2 13.0 Reporter Kelly Bit [email protected] 212-617-1097 Equity Statistical Arbitrage 3.4 0.6 7.3 Contributing Katherine Burton Fixed Income Arbitrage 3.7 0.6 3.7 Reporters [email protected] 212-617-2335 Short-Biased Equities 7.2 3.2 3.4 Saijel Kishan [email protected] Emerging Market Debt 13.3 -1.1 2.8 212-617-6662 Contributing Matthew Kelly Capital Structure Arbitrage 2.1 -1.3 2.8 Data Editors [email protected] 609-279-5064 Directional Fixed-Income 5.3 -0.4 2.7 Anibal Arrascue [email protected] Convertible Arbitrage 2.7 -0.2 2.5 609-279-5084
Market-Neutral 5.5 -1.7 2.0 Newsletter Nick Ferris Business Manager [email protected] 212-617-6975 Multi-Strategy 4.0 -0.8 1.9 Advertising [email protected] Long/Short Equities 5.8 -3.4 1.8 212-617-6975 Reprints & Lori Husted Merger Arbitrage 3.7 -1.7 0.8 Permissions [email protected] 717-505-9701 CTA/Managed Futures 1.7 0.3 -0.6 To subscribe via the Bloomberg Professional Terminal type BRIEF
Distressed Securities 12.0 -3.1 -1.4 © 2011 Bloomberg LP. All rights reserved. This newsletter and its contents may not be Long-Biased Equities 5.3 -3.5 -6.1 forwarded or redistributed without the prior consent of Bloomberg. Please contact our reprints and Source: Bloomberg Hedge Fund Indices permissions group listed above for more information. Type HFND
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Esma Gregor
Subject: FW: MathFinance Newsletter w photo
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March 5, 2012 8:10 pm Superfast traders feel heat as bourses act
By Jeremy Grant and Telis Demos
Wall Street’s “squawk boxes” and Twitter feeds were gripped briefly last week by talk of a huge deal: more than 100,000 Treasury futures contracts were traded just after Ben Bernanke, Federal Reserve chairman, began speaking about the US economy.
The volume of trading was such that it raised suspicions that a computer program or “fat fingered” dealer was to blame. One theory was that an “algo” run by a so-called high- frequency trader had erroneously fired off orders in electronic bursts at ultra-fast speeds.
In the event, the trade was not a mistake. But the gossip showed how widespread the fear has become that HFT algorithms – which make up the bulk of activity in futures and equities – could cause or exacerbate big market swings, as happened in 20 minutes of trading in the “flash crash” of 2010.
Click to enlarge HFTs have drawn the attention of regulators and some exchanges are now acting. Deutsche Börse said last week it would issue punitive charges to traders if they sent too many orders into the exchange that do not result in deals. The move is an attempt to clamp down on what it calls “stupid algos”. Like other exchanges, the German operator has seen a surge in the number of orders streaming into its trading system as HFT has spread.
HFTs use sophisticated programs to interpret or anticipate market signals. The computers trade in fractions of seconds and earn profits by exploiting tiny price differences thousands of times a day.
Calls for a financial transactions tax in Europe, aimed partly at slowing down HFT, have grown louder. Political pressure in France has cast HFTs as unscrupulous “speculators”.
A UK government-sponsored study into UK equity markets, known as the Kay Review, found that a majority of asset managers, corporate treasurers and others were critical of HFT, “some vehemently so”. Regulators have been asking whether the algorithms used by HFTs could go awry and create systemic financial problems. They are also trying to assess whether the liquidity they provide is as beneficial to other market participants as HFT proponents claim.
Beyond isolated action by exchanges such as Deutsche Börse, there are few signs yet of the much anticipated clampdown on HFT that many market observers felt was inevitable a year ago.
Richard Balarkas, chief executive of Instinet Europe, a broker, says: “There was a period probably a year to 18 months ago when high-frequency traders were being blamed for growing dodgy vegetables and everything in between. We’re past that phase.”
Part of the reason for that is that HFT companies have been on the offensive, lobbying regulators in Washington and Brussels. Remco Lenterman, chairman of the European Principal Traders Association, says: “We have done lots to try to educate the marketplace, so I think that debate has become more balanced.”
Last week the Commodity Futures Trading Commission, the US regulator, said it would begin a review of HFT and algorithmic trading. That follows a move last year by the Securities and Exchange Commission to require brokers to have proper risk controls in place before allowing their HFT clients to piggyback on their systems to access exchanges.
The SEC has also instigated a limited system of single stock “circuit-breakers” to prevent sudden price swings. Since August, according to Credit Suisse, the number of incidents when such breakers kick in has jumped, after the scheme was extended to a wider range of stocks.
In Europe, the European Securities and Markets Authority has issued guidelines on automated trading and the European Commission is working on new rules for HFT.
In time, the rules are expected to have an impact and, as such, raise questions over the viability of HFT. Fitch, the credit rating agency, says that increased regulation of HFT “could compress already thin margins associated with the electronic trading of cash and derivatives securities on exchanges”.
It is that risk that has prompted exchanges, such as Deutsche Börse, which derive a growing share of their revenues from HFT, to act. The aim is to stamp out unwanted practices before regulators impose tougher rules. That action could end up benefiting the larger and more established HFTs with the best relations with exchanges.
At the same time the concept of algorithmic trading is increasingly being accepted and used by asset managers, the so-called “buyside”. Buyside traders are increasingly investing in technology to overcome some of the potential advantages that HFTs are said to have, such as being able to run ahead of other traders’ orders or withdraw liquidity when trading moves against them.
“There is anti-gaming logic and other features in our own algos that account for high frequency behaviour. It’s not clear to me the game is as rigged as some people claim it is,” said Milind Sharma, chief executive at QuantZ Capital Management, a quantitative trading hedge fund that makes bets over days or weeks.
All this indicates that HFT is likely to continue to grow, including in emerging markets, say industry experts. Bursa Malaysia last week said it was preparing to allow HFT later this year.
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Sandy Warrick, chief risk officer at equity market-neutral hedge fund QuantZ Capital Management, says his firm can provide tail risk and “black-swan protection” through its different sub-strategies, and, as a result, he says QuantZ does “asymmetrically well” during extreme market events.
“A key philosophical differentiator versus most quants and bottom-up stock pickers is our macro regime overlay as well as the use of ‘meta-models,’” Warrick explains. “Our world macro regime model classifies the world into a finite number of terminal states, which in turn maps to different alpha models. One can use what we call ‘meta-models’ to predict the likely efficacy of our sub-strategies, which in turn drives the dynamic leverage across them. Dynamic leverage combined with some meta-model foresight can allow one to truncate the left tail of the returns distribution and presumably accentuate the right skew at the same time. Extreme diversification across stocks, sectors, models and even horizons keeps the idiosyncratic risk contained, and usually results in portfolios where the realized VaR is substantially lower than that predicted by most vendor risk models.”
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