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October 05, 2016  

Deja Vu: Hype About Strategy Lags Returns

The performance of statistical-arbitrage funds appears to be faltering amid ongoing media hype about quantitative strategies.

Consider A.R.T. Advisors’ A.R.T. International Investor, an $850 million fund run by stat-arb veteran Aaron Sosnick, with backing from Caxton Associates. As of Aug. 31, the fund’s net asset value was down 1.2% year-to-date, compared with a 3.1% gain last year, according to Riva Capital, a Geneva-based fund-of-funds operator that invests with a number of stat-arb managers.

Others whose performance has declined of late include GSA Capital, whose GSA International fund was down 3.5% year-to-date at the end of August, following an 11.4% gain last year. That vehicle had $1.5 billion of gross assets at yearend 2015.

Academy Quantitative Global Fund, run by Ellen Wang’s Academy Investment, was showing a loss of 0.8% through August, versus a 2015 profit of 7.4%. And a stat-arb vehicle managed by BlackRock, dubbed BlackRock EOS, was down 5.1% through Sept. 20, following a 6% gain last year, according to Riva’s data.

Stat-arb investors outperformed fundamental equity managers in late 2015 and early 2016 as volatility in equity markets spiked. But the funds have struggled in recent months as the market resumed a gradual climb — even as marketers and the financial media continue to trumpet the performance of quant managers.

It’s a pattern market veterans have observed many times in the past: investor demand for a fashionable strategy peaking just as returns start to drop. Earlier examples include the hype surrounding asset-based lending funds immediately prior to the credit-market crash of 2007, and a surge in demand for global-macro vehicles in the wake of the financial crisis — followed by several years of lackluster performance.

While quant managers like to talk about uncorrelated returns, a high degree of correlation has crept into the stat-arb sector, sources said. The chief operating officer at a large quant-fund operation gave a hypothetical example: “You have a team, let’s say at Millennium Management. The portfolio manager has five people under him. The No. 3 guy leaves to join Paloma Partners. He leaves with a strategy that Millennium is still running. And then that guy’s No. 2 leaves for Balyasny Asset Management. Now you have three hedge funds running the same strategy.”