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TOP QUANTITATIVE HEDGE FUNDS
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Overview
New Hedge Funds are being established on a daily basis (and often, it seems, are shuttered equally quickly). However, there are several prominent Quant Hedge Funds that have had a significant track
record, and while longevity is no guarantee of future staying power, these firms are considered leaders in the Quant Hedge Fund space:
D. E. Shaw
Quantitative Management Associates
Two Sigma
Renaissance Technologies
AlphaSimplex Group
Capula
AQR Capital
PanAgora
Acadian Asset Management
This list is by no means exhaustive. For example, many multi-strategy hedge funds, while not typically known as Quant Hedge Funds, have significant quantitative strategies that they run as part of
their platform. Consider Highbridge Capital Management, a $29B diversified investment platform comprising hedge funds, traditional investment management products, and credit and equity
investments with longer-term holding periods. Among other strategies, Highbridge offers Convertible Bond Arbitrage and Statistical Arbitrage funds, which are typically thought of as more
quantitative strategies than some of their other product offerings, which include credit and global macro investments.
Additionally, keep in mind that firms other than Hedge Funds run quantitative trading strategies. Many large banks do, via proprietary trading divisions. However, with the implementation of the
Volcker Rule, banks are limited in the types of investment activities they can engage in. As a result, many quant trading strategies have been moving and likely will continue to move from internal
trading desks at the banks to banks asset management arms.
(NOTE: All information is taken from company websites unless otherwise indicated.)
D.E. SHAW
Founded: 1988
Based: New York City
Employees/Size: 1,100/approximately $26 billion in investment capital (as of March 1, 2012)
Description: The firm has a significant presence in many of the worlds capital markets, investing in a wide range of companies and financial instruments within both the major industrialized nations
and a number of emerging markets. Its activities range from the deployment of investment strategies based on either mathematical models or human expertise to the acquisition of existing companies
and the financing or development of new ones.
Strategies: The firms quantitative strategies are for the most part based on:
the use of mathematical techniques to identify profit opportunities arising from subtle anomalies affecting the prices of various securities;
the application of proprietary models designed to measure and control various forms of risk;
the use of quantitative techniques to minimize the transaction costs associated with the purchase and sale of securities; and
the utilization of proprietary optimization technology to construct dynamically evolving investment portfolios based on these profit opportunities, risk factors, and transaction costs.
In the course of identifying profit opportunities, the D. E. Shaw group analyzes an enormous amount of data associated with tens of thousands of financial instruments
associated with any one such instrument. Data is obtained from many countries throughout the world, and covers a wide range of asset classes. When this analytical process yields a new model the firm
believes to be of predictive value, it becomes eligible for deployment within one or more trading strategies, in some cases along with a dozen or more other models involving some of the same financial
instruments, but arising from different market anomalies.
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The firms proprietary optimization technology was designed with the objective of maximizing expected return while controlling the aggregate risk associated with a portfolio that may in some cases
include simultaneous positions in several thousand securities. Rather than consider each transaction in isolation, the firms portfolio optimization software is designed to account for complex
interrelationships among a large set of financial instruments that may range over a number of different asset classes. In many cases, the firms optimization algorithms are able to enhance risk-adjusted
returns not only through conventional diversification, but by establishing offsetting exposures to various risk factors at the portfolio level.
Portfolios are often reoptimized on a more-or-less continuous basis, with a steady stream of trades executed to take advantage of newly emerging potential profit opportunities
various forms of dynamically varying risk. Time-sensitive trading decisions are often made very rapidly using real-time data obtained from various sources throughout the worlds financial markets.
The firm trades on nearly a 24-hour basis, and typically executes tens of thousands of transactions per day.
QUANTITATIVE MANAGEMENT ASSOCIATES
Founded: 1975
Based: Newark, NJ
Employees/Size: 36 investment professionals (plus additional office staff)/approximately $83 billion in assets under management (AUM) as of March 1, 2012
Description: We see investment potential in small but widespread mispricings of securities. Active strategies can play a key role in meeting investment objectives.
from values implied by underlying fundamentals, and active management can improve returns by positioning a portfolio to profit from an eventual return to fundamentals. These deviations from fair
values create opportunities that our processes are designed to identify and exploit. Because these are patterns that persist over time, rather than fleeting trends, we are confident that our processes can
continue to outperform over the long term.
Our bottom-up approach combines the principles of valuation theory and behavioral finance with the skill and judgment of our investment professionals. Team members averaging 20 years of
investment experience and bringing diverse perspectives, including university professors, engineers, physicists and economists have worked smoothly together through a wide range of market
conditions.
Our proprietary optimization process generates diversified portfolios across a large number of stocks. And by constraining risks such as size, sector/industry, and deviation from benchmark, while
vigilantly focusing on liquidity and transactions costs, we believe we can target alpha generation more effectively.
QMAs investment approach is sensible and sound-but not static. Through ongoing research, we continue to find ways to enhance the adaptive nature of our investment processes.
Strategies:
Quantitative Core Equity
Value Equity
Equity Indexing
Asset Allocation
Structured Equity
TWO SIGMA
Founded: 2001
Based: New York (Hong Kong, Houston and London satellite offices)
Employees/Size: About 300 (estimated)/several billion dollars (May 2012)
Description: We have been successfully applying our disciplined, process-driven investment trading strategies since 2001. These strategies, which are expressed across various markets and asset
classes, are based on statistical models developed using rigorous mathematical analysis and the industry insight of Two Sigmas large and experienced team. Developing these strategies requires vast
computational resources to successfully identify, quantify and act on market opportunities while closely monitoring risk exposure.
Technology is an integral part of the trading strategies, corporate functions and life in general at Two Sigma. To us, technology is a profit center, not merely a cost item, and it continues to be a driving
force behind our company structure. Each day, we work in small teams to develop and improve analytical and measurement tools for the financial markets, and we encourage collaboration a
structure that seems rare in the financial field. In fact, many have observed that we look and feel a lot like a software firm.
RENAISSANCE TECHNOLOGIES
Founded: 1982
Based: Long Island, New York, London
Employees/Size: 275/$15 billion
Description: Renaissance Technologies LLC is an investment management company dedicated to producing superior returns for its clients and employees by adhering to mathematical and
statistical methods.
ALPHASIMPLEX GROUP
Founded: na
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Based: Cambridge, MA
Employees/Size: 28/na
Description: AlphaSimplex specializes in absolute-return investment strategies that are implemented primarily with futures and forward contracts. Using leading-edge quantitative techniques, our
unique approach to investing provides the adaptability and contextual decision-making usually associated with fundamental managers, but within a purely quantitative, risk controlled framework.
Each of the firms investment strategies is based on a multi-model approach to portfolio management that seeks to generate alpha with greater consistency and that facilitates the regular addition of
newly developed models.
Strategies: Quantitative Global Macro is a multi-model quantitative global macro strategy that relies on a diversified set of factors across many different markets. The component models that make
up the product have been developed over a number of years and a diverse set of market environments. For any given market environment, there are at least one or two component models designed to
generate alpha for that specific environment. The manager uses advanced statistical techniques to dynamically weight the component models to most effectively exploit current market conditions.
Global Tactical Asset Allocation is an extremely capital-efficient overlay or portable alpha strategy whose target is to add an incremental 1 or 2 percentage points of return to an existing portfolio
without increasing the existing portfolios volatility by more than 1 or 2 percentage points annually. The strategy can also be managed at higher risk levels to generate higher returns.
LASER and GLOBAL ALTERNATIVES use futures and forwards to replicate exposures to a diversified set of the most common liquid risk premia driving hedge-fund returns. This strategy provides
similar diversification benefits as a fund of hedge funds, and is well-suited for large institutional investors who cannot otherwise find adequate capacity among hedge-fund managers, as a liquidity
buffer with an otherwise less liquid portfolio, and for smaller investors who would not otherwise have access to the diversification benefits of hedge funds because of minimum-investment
requirements.
CAPULA
Founded: 2005
Based: London (Greenwich, CT and Tokyo)
Employees/Size: Under 50/$9B (2011)
Description: Capula Investment Management LLP is a global fixed income specialist firm. The firm manages fixed income trading strategies in absolute return and enhanced fixed income products,
along with a tail risk hedge product. Capula Investment Management LLP focuses on developing innovative investment strategies that exhibit low correlation to traditional equity and fixed income
markets.
What differentiates Capula is its macro focus, strong trading discipline and short-term orientation rather than a medium-term investment style. The firms understanding of liquidity risks and tail risks
has helped it thrive through all stages of the investment cycle, including periods of extreme market disruption. The Capula GRV Fund is focused on interest rates and macro trading. The fund engages
in relative value and convergence strategies that seek to exploit pricing anomalies in the government bond, interest rate swap and major exchange traded derivatives markets and employs a defensive
macro overlay. Investment themes are primarily driven by alpha generation and are intended to stay neutral to directional moves in major capital markets. The Capula Tail Risk Fund invests in a range
of instruments primarily in G7 markets. It targets superior returns in times of liquidity and systemic crises while minimizing downside during normal market conditions. Both funds are actively
managed in the proprietary trading style.
AQR CAPITAL
Founded: 1998
Based: Greenwich, CT
Employees/Size: 190/$44B (end 2011)
Description: AQR Capital Management is an investment management firm employing a disciplined multi-asset, global research process. AQRs investment products are provided through a limited
set of collective investment vehicles and separate accounts that utilize all or a subset of AQRs investment strategies. These investment products span from aggressive high volatility market-neutral
hedge funds, to low volatility benchmark-driven traditional products. Investment decisions are made using a series of global asset allocation, arbitrage, and security selection models, and implemented
using proprietary trading and risk-management systems. AQR believes that a systematic and disciplined process is essential to achieve long-term success in investment and risk management. In
addition, models must be based on solid economic principles, not simply built to fit the past, and must contain as much common sense as they do statistical firepower.
PANAGORA
Founded: 1989
Based: Boston, MA
Employees/Size: 50-200/$22.3B (end 2011)
Description: PanAgora is a quantitative-based investment management financial institution that utilizes both bottom-up stock selection strategies, as well as, multi-alpha top-down macro
strategies. We seek to provide investment solutions using sophisticated quantitative techniques that incorporate fundamental insights and vast amounts of market information. While PanAgoras
investment strategies are highly systematic in nature, the processes deployed within these strategies are built and overseen by talented professionals with significant and diverse investment experience.
Innovative research plays a central role in our investment philosophy and process, and is an essential component of our firms ability to deliver attractive investment solutions. Investment teams are
organized into an Equity Strategies group and a Multi Asset Strategies group. Most investment team members are engaged in original research using fundamental intuition, market intelligence, modern
finance and scientific methods.
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Quantitative Trading Strategies
PanAgoras investment strategies are based upon these guiding principles:
Capital markets are not perfectly efficient and therefore present attractive investment opportunities for disciplined investors.
Innovative research that blends creativity with modern financial theory and statistical techniques (art and science) is the foundation of a successful investment process.
A systematic approach to investing that combines intuitive, fundamental thinking with quantitative techniques is likely to generate persistent, and attractive risk-adjusted returns.
Attention to risk and efficient implementation may preserve and often enhance performance results.
Clearly defined objectives, transparency, and access to talented investment professionals helps to achieve client satisfaction.
ACADIAN ASSET MANAGEMENT
Founded: 1987
Based: Boston (Singapore and London)
Employees/Size: ~200-500/$48B (3/31/12)
Description: Acadian has a rigorous and structured investment process. We quantify most aspects of our investment process, including the excess return we believe each security in our investment
universe will generate over a particular horizon, and the risk we expect a particular portfolio to experience relative to its benchmark. The objective of this note is to explain why we believe a
quantitative approach makes sense, and what advantages and disadvantages such an approach has relative to more traditional approaches. We believe that quantitative techniques are tools. They are
ways of applying traditional approaches to making investment decisions in a disciplined and systematic way. Thus our approach to investing is not at odds with a traditional approach. We use the same
tools many traditional portfolio managers use, but attempt to apply them in a very systematic and disciplined way, avoiding emotion and slippages in implementation.
Acadian specializes in active global and international equity strategies, employing sophisticated analytical models for active stock selection as well as peer group (country, region and industry)
valuation. We also offer fixed income strategies in the emerging markets. Our proprietary database covers over 40,000 securities in more than 60 markets worldwide. Acadians extensive research
capabilities are used to develop customized investment management strategies for our clients.
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