Under more regular circumstances, it would be fair to assume that quant funds enjoy a competitive advantage over its peers in the past when the markets were fairly consistent with no large “black swan” events that fundamentally shake up the financial landscape and usurp the rules.
However, with the onset of low interest rate climate coupled with zero monetary policy in response to COVID-19, followed by the latest volatility and short squeezes caused by the activities of Redditors in the markets with stocks such as GameStop and AMC, the rule book has been completely thrown out the window where past performance increasingly cannot predict future performance.
In addition, with a new group of investors who tend to view the world of investing in a very different way, traditional patterns established over many decades have broken across medium-term frequencies (monthly observation typically used by traditional quant equity strategies). The result has been soaring non-profitable companies and the value factor to underperform to such a degree that large amount of capital is fleeting the value behemoth AQR. The co-founder and CEO of AQR, Cliff Asness, went on Bloomberg TV recently in a great interview and talked about the status about quant investing and it seems plain that things may have changed for good, with old patterns never coming back.
The collective market returns of quant hedge funds seem to suggest that we may be observing a “quant winter” – a challenging time for quant models while they recalibrate to adapt to the current environment – and one that may continue for a while longer.
A quantitative hedge fund will base trading decisions on a mathematical model (which may be populated in part by fundamental factors), but there is generally little human judgment with respect to trading decisions outside of this model. In other words, Quantitative Analysts develop intelligent models that predict which trades to make.
Compared to fundamental driven hedge funds, quant funds needed to make larger adjustments to their systematic and mathematical models, thus holding their returns back in the past year. Quant funds are certainly looking to make changes to their assumptions such as including human intervention against the backdrop of fast moving and less predictable market movements, as well as including more asset classes as input for their models. They are also looking to trade other asset classes that could be less volatile and would allow their predictive models to work better.
The quant funds who are navigating through the quant winter will be looking for as much flexibility from its broker as possible in terms of technology and market access.
As a Fintech before the term Fintech was coined, Saxo’s business model as a digital first broker since 1992 offers an open banking architecture, where quant funds can connect to the trading architecture in a variety of ways. These electronic trading services can be a solution for quant funds to potentially reap the benefits from a paradigm shift into the new normal where new rules are being written everyday whilst being connected to Saxo’s trading architecture through our comprehensive set of APIs. The APIs allow for automated placement of orders, providing real-time feedback on the status of the orders, the value of the positions, and monitoring market movements across various asset classes. In addition, the human trader can monitor the account simultaneously using Saxo’s omni-channel trading platform either on a personal computer, laptop, tablet or mobile device, in case there’s a need for the trader to step-in.
Quant funds would also immediately have electronic trading access to seven different asset classes with Saxo: equities, bonds, currencies, futures, options, CFDs and mutual funds across the globe. This would allow the flexibility of adding or switching new asset classes to their quant modelling. They are free to experiment with their models and trade with the best fit asset classes to achieve the best results.
At Saxo, we believe that the quant winter is temporary. Eventually those who have successfully adapted with the most flexible set of tools available to them, will certainly be far ahead of the pack.