Quantitative funds are gaining more ground among hedge funds in terms of trading volume and inflow of capital. According to The Wall Street Journal, this year, quantitative funds account for 27% of stock trading in the US, up from 14% in 2013. Moreover, as quant funds increased their stock trading volume, their peers in the hedge fund industry, as well as traditional asset management saw their volumes decline dramatically, although not as dramatically as banks, which accounted for just 3% of total stock trading this year, compared to 12.5%in 2013. Quant funds also have registered a steady increase in assets under management, which reached $920 billion in 2016, versus $510 billion in 2010, although non-quant funds also saw their AUM figures grow to $2.10 trillion from $1.41 trillion.
In addition, as stock market has had a solid bull run in the last couple of years, investors started to pull their money out of hedge funds, as they lagged the market and still charged their clients fees that some may deem exorbitant (hedge funds usually charge 2% of assets and 20% of returns). If in 2014, traditional hedge funds saw a net inflow of $58 billion from investors, the following year that figure declined to $27 billion, but in 2016 traditional hedge funds registered a net outflow of $83 billion. By comparison, quant hedge funds saw smaller inflows of $18 and $17 billion in 2014 and 2015, but they also had an inflow of $13 billion.
Quantitative hedge funds have also been showing better returns compared to some of their peers. According to Hedge Fund Research, the HFRX Quantitative Directional Index is 7.12% in the green year-to-date, slightly below the 8.85% return generated by the HFRX Equity Hedge Index. Over a longer period, quants show more steady returns with the HFRX EH: Quantitative Directional Index up by 4.54% in the last three years, compared to 1.91% for the Equity Hedge Index. Although the absolute leader among hedge funds are funds focused on technology and healthcare, with the HFRX EH: Technology/Healthcare Index up by 14.98% year-to-date and 9.20% in the green for the past 36 months.
In this way, quantitative hedge funds, which rely on algorithms and computerized investing, have been becoming more popular and more hedge funds are starting to rely on technology in order to beat the market and analysts predict that it will be a crucial aspect of the hedge fund industry in the near future. In the meantime, a number of funds have already established themselves as industry leaders. The annual Hedge Fund 100 ranking compiled by Institutional Investor Alpha shows that five of the top six hedge funds of 2017 are quantitative hedge funds and on the following pages we are going to take a closer look at these funds.
Following quantitative hedge funds can be useful even if you don’t have the resources to invest in them. Hedge funds are mandated to reveal their long equity positions every quarter by submitting 13F filings with the Securities and Exchange Commission. Imitating hedge funds’ stock picks can help smaller investors beat the market over the long run. At Insider Monkey, we have developed a strategy that involves identifying the best small-cap stock picks among best performing hedge funds. Since it was launched in May 2014, the strategy returned over 67% and beat the S&P 500 ETF (SPY) by over 20 percentage points (see more details here).
Having said that, let’s take a look at the five best quant funds and their top five stock picks.