Quants Now Trade Exotic Stuff. But Can They Handle Illiquidity?

The search for elusive alpha is sending a handful of computer-driven hedge funds trawling the remotest corners of financial markets. They’re a subset of the trend-following strategies known as commodity trading advisers, or CTAs, that were popular when central banks pushed up stocks and bonds over the past decade.

Photo: Colourbox

Now a few of them are seeking uncorrelated returns and a little extra alpha in anything from cheese and Turkish scrap steel to obscure chemicals or eggs in China.

With at least $7 billion invested across at least eight such funds, up from one fund and $1 billion five years ago, these alternative CTAs remain very much a niche strategy. But trend-following funds have been blamed in the past for amplifying selloffs in some of the most liquid assets, because they tend to rely on similar models. As more money is targeting much smaller markets, even some fund managers warn of risks if managers pile into the same trade or unforeseen events cause a selloff.

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