The news revealed this month by our sister publication HFM Week that the $220 billion California State Teachers’ Retirement System has ploughed over $6 billion of allocations this year into CTA, systematic macro and risk premia strategies as part of a significant ramp-up of its risk-mitigating strategies portfolio is truly a sign of the way the wind is blowing at the moment.
Quant is all the rage – whether it is the traditional systematic CTA-style managed futures programmes, or the booming factor-based quantitative strategies that are enjoying such massive growth, or the so-called ‘quantamental’ strategies that have become so fashionable of late, or the proliferation of low-cost passive beta products.
The continued extension of the bull market this year has been a surprise to most investors, and a concern to many. Allocators are looking with increased urgency to find ways of reducing their exposure to a big correction – and, for many, the quant sphere has been an obvious port of call.
Crisis protection has become a priority for investment consultants and institutional investor committees – and for many private investors too – and it is easy to see why. Nobody needs to suffer another severe equity market meltdown like that in 2008 – or in 2002, for that matter, or in 1998 or 1987 or multiple times before.
Investors have to find ways of protecting themselves, while at the same time continuing to dance while the music is still playing.
The headlong rush by so many investors in the previous two or three years away from active investments into low-cost passive products and ETFs has greatly increased their vulnerability to a major market or liquidity event.
With hedge funds and active strategies coming back into favour again this year, it seems that many investors now recognise the extent to which they are exposed – and the need to have as much insurance, or risk mitigation, in place as possible.
CTAs have proved many times in the past their ability to act as a buffer and a valuable diversifier in times of equity market stress – most notably in 2008, when managed futures funds returned around 30% in a year when equity markets lost 40%.
Those sorts of uncorrelated returns are like gold dust at times when investors need them most, and major institutional allocators are clearly betting that systematic strategies will perform the same vital crisis protection role again if and when another big equities correction or bear market strikes.
Quite apart from that, there is also the simple fact that quant and systematic strategies generally have much greater bandwidth and scalability to accommodate substantial capacity, as evidenced by the stunning recent growth in assets under management enjoyed by several of the leading quantitative or process-driven investment managers.
As the most-recent half-yearly analysis of the Billion Dollar Club of top US hedge fund managers conducted by our sister publication Absolute Return recently made clear, the leading quant firms such as AQR, Two Sigma, Renaissance or Bridgewater have seen phenomenal growth in AUM over the past 12 months or so of as much as 30-50%.
A similar trend has been seen in Europe, where Marshall Wace – whose process-driven TOPS long/short equity investment strategies have been the key driver behind the firm’s dramatic growth in size over the last few years – has become the largest European-based hedge fund manager for the first time with assets of $28 billion, ahead of leading quant/CTA giants Winton and Man.
In the same way as CTAs are seen by investors as portfolio diversifiers and (potentially) risk mitigators, quantitative or process-driven hedge fund investment strategies in other areas such as equities are clearly also seen as offering something different and distinctive that can provide diversification in terms of both risk and return.
At the same time there has also been a massive surge in money going into long-only quant products such as so-called smart beta strategies, alternative risk premia products, multi-asset funds and factor-based ETFs – often, although not always, at the expense of hedge funds.
Most of these have yet to be tested in a crisis, and the extent to which some or all of these products either mitigate – or exacerbate – investors’ risk exposures in the event of a downturn remains to be seen.
Nobody in their right minds would wish for a repeat of 2008. But if or when markets do stumble, it will be very revealing to see which products, strategies and funds protect their investors – and which don’t.