Man/hedge funds: momentous times give quants a reset
Hedge fund group’s one-year performance could have been stronger but the outlook is rosier
The late Bernard Madoff was a secretive scoundrel masquerading as a hedge fund genius. Such scandals are one reason some investors prefer quantitative funds. These do not rely on claims of instinctive flair. Instead they deploy a transparent investment process coupled to machine learning in the hope of steady returns. A unit called AHL provides that steadying effect for Man Group, which published an optimistic trading statement on Friday.
The UK-listed hedge fund group formed Man AHL in 1987 to trade trends in commodities and currencies. Later quantitative models incorporated machine learning to support speedy trading. Computers sift through reams of data to spot exploitable trading patterns. AHL accounts for about a quarter of the managed funds at Man. Fees are low — usually well below 1 per cent per annum.
The trick, especially for trend-following investment programmes, is to restrict losses at big market reversals of the kind that occurred in March 2020. Man Group appears to have avoided that outcome last year. However, its shares are still lagging behind those of Schroders, an old-fashioned fund manager depending mainly on human stock pickers.
Man’s one-year performance could have been stronger. In the first quarter, the bulk of a $3.4bn increase in funds under management to $127bn came from better performance, though key markets rose by more. Group inflows for the quarter, which represent new funds committed by clients, were only $600m. That disappointed analysts expecting half as much again.
The outlook is rosier. AHL’s returns over three and five years have handily beaten relevant benchmarks, such as Barclays BTOP indices. The group’s boss Luke Ellis Man is hopeful of winning some big new mandates.
Hedge funds have had their best first quarter since 2006. Within that universe, quant funds are doing better than before. Many of them, like AHL, are momentum followers. These typically benefit from long, sustained rises or falls in markets. A period of wild volatility a few years ago hurt returns. Gently rising markets amid economic recovery should be good for Man.