In a recent article at the Financial Times, Cliff Asness explains why his firm is positioned for one of the most robust recoveries for factor investing since the tech bubble of 1999. Here’s an excerpt from the article:
A computer-powered investment fund run by AQR posted double-digit gains in the opening days of 2022, building on a strong performance last year that has bolstered industry hopes that the long “quant winter” has finally passed.
AQR Capital Management’s Absolute Return fund, which combines a broad array of investment strategies, last week notched up gains of 10.4 per cent net of fees. The rise marked its strongest ever five-day period since inception 23 years ago, according to people familiar with the matter.
AQR’s co-founder Clifford Asness described the week as “epic” on a Twitter post. Absolute Return’s gains come after returning 16.8 per cent to investors in 2021.
The strong run for AQR, which was one of the victims of a years-long period of lacklustre returns produced by traders that use fast computers and mathematical models to place bets, comes as the broader industry is also showing signs of recovery.
The average quant equity fund tracked by Bank of America returned 27.8 per cent last year, compared with the US stock market’s 26.5 per cent returns and the average 24 per cent gains of traditional stockpickers.
“It looks like 2020 was more of a bump in the road than something fundamental,” said Isabelle Bourcier, head of quantitative investing at BNP Paribas Asset Management. “The recovery in 2021 has been quite good and I’m confident for 2022.”
Many of the bigger market signals exploited by quantitative investors have struggled in recent years, with the outbreak of Covid-19 proving to be particularly rough on some strategies. This had sparked a debate over whether quant investing was merely suffering a bad spell or had become obsolete.
However, last year’s performance indicates a strong turnround. About 70 per cent of large quant funds outperformed their benchmarks in 2021, according to BofA, compared with just 40 per cent for stockpickers.
Quant funds focused on smaller stocks did even better last year, with all but one of the 15 funds monitored by BofA outperforming the Russell 2000 index of smaller listed companies and outperforming by 12 percentage points on average.
“We are encouraged by the exceptional performance across our strategies to start 2022, especially following a strong year for many of them in 2021,” Asness said in an email. “While timing is always uncertain, and it won’t be a straight line, we believe this positions AQR for one of the most robust recoveries for factor investing since the tech bubble of 1999.”
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