Rise of Robots: Inside the World's Fastest Growing Hedge Funds

Believe the hype. Quants have never been more popular, reports Bloomberg.

After doubling over the past decade, assets run by so-called systematic funds have hit a record $500 billion this year, according to estimates from Barclays Plc. 

In some ways, their meteoric rise is due to the same technological advances that are disrupting most industries. Faster computers and better data has enabled asset managers to automate skills that once were limited to market legends.

The diversity of quant strategies, however, makes it hard to generalize about the group. Categories include factor investing, risk parity and managed futures -- not to mention secretive black-box funds, like Renaissance Technologies LLC. Even fundamental traders now arm themselves with quantitative techniques, accounting for $55 billion of systematic assets, according to Barclays.

One thing can be said for sure: funds using automated investing processes are the fastest growing segment of the hedge fund universe. 

“Fundamentally driven managers have historically captured the focus, the flows and the glory,” wrote the Barclays team led by Louis Molinari, global head of capital solutions, in a note to investors Friday. “But in the last few years, a resurgence of interest in the space has developed from both managers and investors.”

Agnostic to specific companies, quantitative funds trade patterns and dynamics across a wide swath of securities. Quants now account for about 17 percent of total hedge fund assets, data compiled by Barclays show.

Narrowing it down, equity quants typically use characteristics shown to deliver outsized returns, like low volatility or low cost. These funds were especially hard hit following the so-called quant quake of 2007, when hidden market dislocations caused a chain reaction of selling among program funds. They finally exceeded their pre-quant quake level last year, reaching a record $152 billion under management, according to Barclays.

The most popular type of quant hedge fund strategy, managed futures funds, aim to capture broad market trends across asset classes and trade futures to do so. They oversee nearly $200 billion, data from the British bank show.

Within the equity cohort, it’s all about diversification. For the first time, investors put the most money behind quant managers trading at least 500 securities, data compiled by Sanford C. Bernstein & Co. show. At 32 percent, their portion of total systematic equity assets towers over the 1.1 percent managed by funds with fewer than 40 securities.

As somewhat anemic returns seep through the entire hedge fund industry, impressive performances from a select few quants have captured investor attention. There’s Quantitative Investment Management, whose $1.2 billion equity fund returned 55 percent this year through May, or Renaissance Technologies’s equity fund, which gained 13.7 percent over the same period, compared with a 5.3 percent rise in the S&P 500 Index.

But performance for the average quant fund hasn’t been so outsized. The 1,070 quants reporting to eVestment have cumulatively underperformed their benchmark by about 1 percent since March 2016 and are flat this year.

That said, the returns are all different depending on the time horizon, asset class and general strategy. For example, fast acting equity quants with mean reversion strategies struggled last month, according to Marko Kolanovic, global head of quantitative and derivatives strategy at JPMorgan Chase & Co., because they made unsuccessful bets that the gap between value and growth would revert.

Hedge Funds Are the Ultimate S…