This document is being provided for the exclusive use of <[email protected]> 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) 1 2 3 4 5 6 7 8 9 10 11 12 “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 $58 million Global Leveraged Market Neutral Fund, up 15.2 percent in 2012 through August after rising 18.1 percent last year, according to people familiar with the fund, and QuantZ Capital Management’s Quark Equity Market 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 working in favor of the winners, say people familiar with the funds, is a 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 approach but also by thinking about different time horizons, says Voitenok. 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.