At the start of the pandemic, investors at the beginning of March were in for an unexpected drop. Along with investors, hedge funds experienced underwhelming performance, to say the least, as nearly all major securities were affected. However, could quant-based hedge funds fare better? How would a computer-based trading system compare to a person when adapting to such a unique economic climate?
To start off, let's take a look at overall hedge fund performance. According to the HFRX Global Hedge Fund Index, which is meant to keep track of global hedge fund performance, it showed a 7.76% loss in March.
Now, if we look at the quant hedge funds, would we see a better outcome? The answer is no.
Quant funds, short for quantitative funds, work by essentially utilizing algorithms and data sets to profit off of the pattern of share prices. For these funds, the pandemic hit just as bad, as Credit Suisse, the financial service company based out of Switzerland, estimates that in the month of March, the average quant fund had nearly halved their normal holding positions and lost 14% on the year.
Renaissance Technologies, arguably the most notable quant fund and most famous among average investors, is no different than the rest. The Renaissance Institutional Equities fund saw an 18% drop in just a month of March (albeit, the fund does tend to hold long positions compared to the high frequency of other funds). The company's Diversified Global Equity fund showed losses of 15.8% on the year. In the month of February, Renaissance saw a loss of 7%, one of its worst months in more than a decade. The $75 billion fund continued to experience turmoil as the market worsened throughout March.
One thing for quant funds was the lack of foresight to see that the market was about to start selling off in March. The warning signs were there for investors as supply chains started to give out in China, and had the quants taken the hint of the “black swan” situation that was about to happen, losses could’ve been prevented entirely.
One hedge fund created by Universa Investments saw a whopping 3,612% gain in March. The so-called “black swan” hedge fund benefits from unexpected market changes, such as the impacts of the pandemic.
The important thing for investors to understand from this episode is to have foresight when investing, and when a pandemic is on the horizon, act accordingly. The likes of Universa Investments and Bill Ackman both predicted the eventual dropoff and leveraged the shattered stock market to make millions. It’s still not too late to buy into the market now, as things haven’t fully returned to normal yet. Make sure to do your research, and ask yourself honestly if you could see a particular stock exceed its current position years from now.
Any thoughts? Feel free to comment below