Human-run hedge funds outperform robot quants in pandemic year

Based on the performance of top hedge funds in 2020, machines still have not made complete mincemeat of human analysts and asset selectors.

Photo: Zz/AP/Ritzau Scanpix

After years of being outgunned and outclassed by computer-driven quantitative strategies, human stock-pickers climbed back on top in 2020.

The dizzying gyrations of the pandemic-stricken year humbled even the most sophisticated of quants - notably behemoths Renaissance Technologies and Two Sigma - whose trading models were thrown off by swings their computers had never seen before.

Overall, human-run funds put up some their best numbers in a decade, with several boldfaced names, including Tiger, Coatue and D1, posting returns in excess of 35 percent. Whether by luck or by skill, they showed that in this most unusual of years, stock-pickers could still stand up to the seemingly inexorable rise of the machines.

"Stock-pickers had several years of self-inflicted under-performance in the past decade, and the narrative was that computers had defeated humans," says John Thaler, a longtime equity manager who returned client money in 2015 and this year started a new firm, Hampton Road Capital Management.

"Then, the quants hit an air pocket of tough relative performance and this year, long-short equity managers outperformed by an enormous amount."


Hedge Fund Winners 2020 Performance* Strategy
Saba ** 74% Credit
Pershing Square ** 66% Long-short equity
High-Flyer China Equity Fund 60% Quant
Coatue ** 58% Long-short equity
D1 Capital 54% Long-short equity
SQN Investors 46% Long-short equity
Tiger Global 39% Long-short equity
UBS O’Connor ** 37% Multistrategy
Caxton 36% Macro
Balyasny Atlas Enhanced 30% Multistrategy
Viking Global Equities ** 25% Long-short equity
Kepos 23% Quant

* Through November

** Through mid-December

Sources: Fund performance according to documents and people familiar with the matter

Big Winners

Many of the top-performing stock-pickers were helped by their investments in tech and private startups, allowing them to easily double the S&P 500 Total Return Index’s 14 percent gain through November. They included Coatue Management, Tiger Global Management and D1 Capital Partners, whose bets soared along with the Nasdaq and a sizzling market for initial public offerings.

At the same time, macro managers, many of whom have complained about years of low volatility, finally got what they wanted. The fallout from the Covid-19 pandemic triggered the biggest fluctuations in over a decade as the global economy ground to a halt and unleashed an unprecedented amount of monetary support from the world's central banks. Andrew Law's Caxton Associates, for example, took advantage and jumped 36 percent through November.

That same turbulence was the undoing of a whole host of quant funds, which were among the year's biggest losers. Their computer models rely on finding patterns in historical data, and many had never encountered a once-in-a-century pandemic.

Renaissance, which oversees USD 60bn and was founded by former codebreaker Jim Simons, said in a September letter to clients that its losses were due to being under-hedged during March's collapse and then over-hedged in the rebound from April through June. That happened because its trading models "overcompensated" for the original trouble.

"This year should call into question some quant strategies," says Andrew Beer, founder of Dynamic Beta. "Building strategies based on five decades of numbers that don't matter today might well be a fool's errand."


Hedge Fund Losers 2020 Performance* Strategy
Renaissance Institutional Diversified Alpha ** -32% Quant
Renaissance Institutional Diversified Global Equities ** -31% Quant
Odey European -28% Long-short equity
AQR Global Stock Selection -22% Quant
Renaissance Institutional Equities ** -20% Quant
Winton Fund *** -20% Quant
Bridgewater Pure Alpha II -17% Macro
Systematica Macro Relative Value -16% Quant
Two Sigma Absolute Return -5% Quant

* Through November

** Through Dec. 18

*** Through October

Yet even before Covid-19 struck, quant funds were already starting to struggle under the weight of their own success. Several had amassed tens of billions of dollars in assets, meaning market inefficiencies detected by their high-speed computers tended to vanish before they could make much money from them.

"What’s gone under the radar is that most quant strategies haven't made much money in several years," says Jon Caplis, head of research firm PivotalPath. They make up 55 percent of funds that have posted losses since 2016, he says. "These strategies were supposed to revolutionize trading but they didn't do that."

There were exceptions, of course. China was a rare bright spot for quant strategies in 2020. Unlike many of their counterparts in the U.S. and Europe, China's top-performing quants returned between 20 percent and 30 percent above their equity benchmarks, according to Qiu Huiming, founder of Shanghai Minghong Investment Management Co., the country's largest data-driven manager.

The flagship fund of the USD 7.6bn High-Flyer Capital Management, for example, returned 60 percent through November, triple the benchmark index.

Qiu noted that because Chinese quants are smaller and operate in a less efficient, retail-dominated market, they have "much greater room for alpha."

Missing Out

Some low-tech stock pickers also lost big after missing out on the meteoric rise that followed March's swoon. London-based Odey Asset Management's European fund declined almost 30 percent. Lansdowne Partners' flagship hedge fund shuttered this year, after a 23 percent drop in the first half.

And this year, the difference between winners and losers has rarely been so stark. Since 2009, the range of hedge fund returns had been fairly narrow and the average result mediocre. In 2020, however, PivotalPath's measure of fund dispersion -- a gauge of performance variability -- hit a record.

"We had every possible volatility scenario over the last five years: high vol, low vol, dislocated markets," says Jay Raffaldini, global head of distribution for UBS O'Connor. Whatever the strategy, if a firm missed the opportunity to make money, it begs the question, "How viable is your business model?"


The topsy-turvy year may have even sparked the enthusiasm of traders looking to make a name for themselves.

While pitch meetings went virtual, due diligence became trickier and in-person gut checks were an impossibility, new hedge funds were launched at a surprisingly robust pace. Fifty-eight managers opened firms in 2020, the most in the past six years, with a median of about USD 55m raised, according to one industry prime broker. A few traders coming out of the largest and most successful firms even exceeded the billion-dollar mark.

Three of the biggest launches were by stock-pickers.

The largest was Alua Capital Management, co-founded by Viking Global alumnus Tom Purcell and Marco Tablada, formerly of Lone Pine Capital. They started in November with almost USD 2bn. Gaurav Kapadia's XN debuted in July with more than USD 1bn in commitments. Ben Jacobs's Anomaly Capital Management started with USD 600m in late October and is expected to amass an additional USD 1bn by mid-2021.

Executives at some of the industry's most influential firms are also looking forward to 2021. Point72 Asset Management's global macro chief, Mohammed Grimeh, said recently that things will normalize by summer. He's been beefing up his team in anticipation of several trading opportunities and weighing potential bets in emerging markets, currencies and commodities.

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