JPMorgan, Renaissance trail Hedge Fund Gains in 2007.
– Big quant shops (Renaissance Technologies Corp. and JPMorgan & Chase Co) trailed hedge fund rivals in 2007. 7 of 10 largest hedge funds (6 of them are quant) lost to benchmark.
– Stewart Massey, founding partner of Massey, Quick & Co., said that most of the failures are because of the large fund sizes lately.
– The largest returns are made by fundamental managers: Shumway Capital Partners LLC ($6.6 billion in assets) 51%, Brett Barakett’s $3.7 billion fund at Tremblant Capital Group gain 22%.
– A $18bn Harbinger Capital Partners fund more than doubled by betting against mortgages and long metal companies.
– The article also gives a list of 2007 returns of the largest hedge funds.
– BGI’s enhanced equity index funds lost 847 bps against their benchmarks for the 12 months ending 2007/09
– The $48.6 billion Alpha Tilts Fund underperformed its S&P 500 benchmark by 478bps for the 12 months ending 2007/09
– The worst-performing strategy was the $296 million Russell 2000 Growth Alpha Tilts Fund, underperforming Russell 2000 Growth index by 847bps
– Only 30 of 70 large-cap enhanced index managers beat the S&P 500 for the year ending year-to-date Sept. 30. According to the PSN investment manager database of Informa Investment Solutions Inc.
– BGI uses an industry-specific characteristics based strategy in industries like financials and energy
130/30 Indices:Like Playing Chess against a computer?
– During the final months of 2007 Credit Suisse (CS) and S&P both launched “130/30 Indices”, where S&P also published the entire index construction approach online.
– Andrew Lo, the developer of the CS index says that their 130/30 index is very different from a traditional index like S&P 500, because the 130/30 index replicates a dynamic trading strategy.
– Lo says that dynamic strategies can be passive as long as “the rebalancing algorithm is succinctly mechanical and easily implementable”. Fundamental indexation and life-cycle funds are two examples of this new approach.
– Lo acknowledges the extra mental effort required to make sense of the new dynamic indices but predicts more dynamic index developments in the future.
How Quants stack up against the fundamentals
– According to JPMorgan, fundammental funds overperformed the quantitative strategies but the picture reverses once the proper risk-adjustment is made and also quant strategies seem to provide a better down-side protection and charge lower fees.
– Among large-cap equity strategies, quantitative strategies have generated more attractive risk-adjusted returns. Their average Sharpe ratio was 0.70 compared to 0.63 for fundamental strategies. Also quant strategies captured 87% of downside markets while fundamental ones essentially captured 100% of down markets.
– The average fee for quant strategies was approximately 10 bps lower than the average fee for fundamental strategies.
– In international markets the quant managers also achieved a higher average return in the last 5 years and a higher information ratio of 0.32 compared to -0.66 of fundamental strategies.
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