Among various strategies that hedge funds employ in order to identify investment opportunities, one of the approaches that stands out is quantitative analysis. Quantitative hedge funds use algorithmic and systematic strategies to implement their investments and they can use hundreds of data points in order to identify profitable long and short positions. As opposed to funds using fundamental analysis that usually perform a detailed, bottom-up analysis of each selected stocks, quant hedge funds only use data that they can quantify and systematize and use it to identify groups of stocks (or other asset classes) to invest in.
There are several prominent quantitative hedge funds, with Jim Simons‘ Renaissance Technologies, David E. Shaw‘s D.E. Shaw & Co., Cliff Asness‘ AQR Capital Management, and John Overdeck and David Siegel‘s Two Sigma Advisors, being among the 5 most successful quant funds. In this article, we will discuss another quant hedge fund, Arrowstreet Capital.
Arrowstreet Capital was founded in 1999 by Peter Rathjens, Bruce Clarke and John Campbell. The fund differs from other quantitative investors as it not just seeks to use quantitative data to make investment decisions, but instead starts with a fundamental approach. Particularly, Arrowstreet focuses on investment insights and uses quantitative tools to test the ideas that are then backtested and analysed thoroughly before being incorporated into a model. Using this approach, allows the fund to go through much more securities than funds that select their stocks manually.
According to a Macquarie Bank’s presentation of Arrowstreet Capital and its Arrowstreet Global Equity Fund (which is owned by Macquarie), Rathjens, Clarke, and Campbell and other members of their team go through 25,000 stocks when selecting positions for their core global equities fund, which are then narrowed down to 150-200 individual companies. Arrowstreet uses many inputs and signals, including fundamental data, such as earnings, value,and momentum. The fund also analyses each point across countries and sectors, which allows it to include a top-down analysis, similar to what fundamental investors use.
Arrowstreet Capital is a private partnership that provides discretionary global asset management for institutional clients, one of its funds being Arrowstreet Global Equity that Arrowstreet Capital Manages for Australia-based Macquarie Bank. It is headquartered in Boston, where the team holds regular meetings, since Campbell is also a full-time professor of economics at Harvard University. Dr. Campbell has served as Arrowstreet’s Co-Director of Research and Executive Director since its foundation. The fund is also led by Anthony W. Ryan, who is Arrowstreet’s President and CEO and CFO Nirali A. Maniar Gandhi. Rathjens is the fund’s Chief Investment Officer, Portfolio Manager and Executive Director, while Clarke serves as Chairman of the Board and Non-Executive Director. Two other partners at the fund are Marta Campillo, who is involved with the implementation of research agenda and is also engaged in developing and improving Arrowstreet’s forecasting and risk models, and George Pararas-Carayannis, who is a Portfolio Manager.
Arrowstreet currently has around $83 billion in assets under management and operates offices in London and Sydney. One of the fund’s core beliefs is that the markets are inefficient and superior risk-adjusted returns can be achieved through a well-conceived investment process that takes into account insights that are often overlooked and reflected more slowly in stock prices.
This approach has served Arrowstreet Capital well, as the fund has generated market-superior returns. At Insider Monkey, we monitor Arrowstreet’s 13F filings and calculate the weighted average returns of its positions in companies with a market cap over $1.0 billion. In the first six months of 2017, Arrowstreet’s holdings returned nearly 12%, beating the S&P 500 by around four percentage points. Over the 12-month period between the end of June 2016 and 2017, the fund’s stock picks generated a return of 27%.
In its latest 13F filing, Arrowstreet Capital disclosed an equity portfolio worth $33.04 billion as of the end of June. The fund contained around 1,500 positions, spread across several sectors. In this article, we are going to take a closer look at the top investments that Arrowstreet held heading into the third quarter.
1. Microsoft Corporation (NASDAQ:MSFT)
In Microsoft Corporation (NASDAQ:MSFT), Arrowstreet Capital increased its stake by 45% to 11.78 million shares valued at $812.16 million during the second quarter. The tech giant has recently signed a number of partnerships with other companies in the cloud space, including Amazon.com, Inc. (NASDAQ:MSFT), Huawei, and Adobe Systems Incorporated (NASDAQ:ADBE). Microsoft Corporation (NASDAQ:MSFT) has an 11% market share in the cloud services market, trailing Amazon.com, Inc. (NASDAQ:AMZN), whose AWS platform has 34% of the market. Since the beginning of the year, Microsoft Corporation (NASDAQ:MSFT)’s stock has advanced by nearly 20%. At the end of June, there were 124 funds tracked by Insider Monkey long Microsoft Corporation (NASDAQ:MSFT), up by three over the quarter.
2. Amazon.com, Inc. (NASDAQ:AMZN)
Arrowstreet Capital also boosted its position in Amazon.com, Inc. (NASDAQ:AMZN) by 125% to 822,827 shares between April and June; the position was valued at nearly $796.50 million. Including Arrowstreet, there were 132 investors in our database that held shares of Amazon.com, Inc. (NASDAQ:AMZN) at the end of the second quarter, compared to 129 funds at the end of March. Recently, Amazon.com, Inc. (NASDAQ:AMZN) has completed the acquisition of Whole Foods, which allowed the eCommerce giant to enter in the grocery retail, where it has the resources to compete with other well-established companies like Kroger Co (NYSE:KR). The acquisition will help the eCommerce giant to expand the number of its Prime members by offering additional incentives. In other news, the company also announced plans to open its second headquarters in North America, where it will employ up to 50,000 people.
3. Apple Inc. (NASDAQ:AAPL)
Ratjens, Clarke, and Campbell’s fund added 3.18 million shares of Apple Inc. (NASDAQ:AAPL) during the second quarter, having amassed 4.77 million shares worth $686.34 million at the end of June. Apple Inc. (NASDAQ:AAPL) has been in the spotlight lately as the company approaches its September 12 event, where it is expected to release a number of new products, including an iPhone and an Apple Watch. However, on September 7, The Wall Street Journal reported that the new iPhone has faced some production issues and its shipments might be delayed. Bernstein analyst Tony Sacconaghi told CNBC in an interview that a significant delay into the start of 2018, could turn customers away to a different device, especially customers shopping around the holidays. There were 115 investors bullish on Apple Inc. (NASDAQ:AAPL) at the end of June, up by two over the quarter.
4. Philip Morris International Inc. (NYSE:PM)
Philip Morris International Inc. (NYSE:PM) saw Arrowstreet inch up its stake by 6% over the quarter to 5.09 million shares worth $597.33 million at the end of June. A total of 44 funds tracked by Insider Monkey held shares of Philip Morris International Inc. (NYSE:PM) at the end of June, unchanged over the quarter. Philip Morris International Inc. (NYSE:PM)’s stock has advanced by nearly 30% since the beginning of the year, even though it missed the consensus estimates in the last two quarters. The company is currently paying a dividend of $1.04, but it is expected that it will increase it in a couple of weeks. In addition, Philip Morris International Inc. (NYSE:PM) has been taking steps to minimize the effects of lower number of smokers around the world. It has introduced iQOS, a smokeless device, which employs heating rather than burning of tobacco. The product has been a success in several countries and Piper Jaffray analysts have recently said that the iQOS product will deliver an upside to Philip Morris International Inc. (NYSE:PM)’s bottom line.
5. Alphabet Inc (NASDAQ:GOOG)
Arrowstreet also disclosed a $563.91 million stake in Alphabet Inc (NASDAQ:GOOG), which contained 620,551 class C shares at the end of June, up by 62% over the quarter. Earlier this year, Alphabet Inc (NASDAQ:GOOG) was fined $2.7 billion by the European Commission and the EU finance ministers are planning to meet to discuss a potential tax hike for digital companies, which include Alphabet Inc (NASDAQ:GOOG). Alphabet Inc (NASDAQ:GOOG)’s stock has gained over 21% since the beginning of the year, as the company managed to beat the consensus EPS and revenue estimates, despite the fine dragging its second-quarter profits lower. Alphabet Inc (NASDAQ:GOOG) seems to be well positioned to continue its growth, as its leading position on the digital advertising market will remain strong and will offer the tech giant resources to pursue its other projects, some of which are bound to become profitable. During the second quarter, the number of investors holding class C shares of Alphabet Inc (NASDAQ:GOOG) increased by 10 to 127.