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.