Report: Quants Perform Best In Generally Negative November

Dec 6 2011 | 8:40am ET

Quantitative strategies performed best during November 2011, generating small gains in a month that saw “broadly negative” performance by hedge funds, according to the latest FRM research report.

Technically-oriented statistical arbitrage managers made money as mean-reverting strategies worked well, according to the “Early View” report.

Long/short equity was the worst-performing strategy in November, particularly long-biased managers who were positioned against the prevailing market directions. Most managers, though, ended the month flat, and the range of performance across managers was much narrower than it’s been in recent months.

FRM says the industry generally has a long bias to risk assets, so the strong sell-off at the start of the month “triggered risk management policies and a widespread reduction of risk.”

The report says managers were “generally bearishly positioned” throughout the month, especially in respect to European exposure. Some managers benefitted from tactical short positions which were reloaded at good prices in October.

Looking ahead, the report finds that hedge fund managers have hesitated to take on risk as long as markets continue to be driven by policy moves and FRM expects this reluctance to persist through the end of 2011.

The report sees opportunities in “shorter duration trades and those which have hard catalysts,” as in the event space where FRM expects to see continued consolidation of companies in low-growth economies.

Hedge funds may also find opportunities to provide liquidity thanks to the declining participation of investment banks. FRM also sees possibilities in the mortgage space, where hedge fund managers are able to produce returns on low risk, liquid trades. “For example, using agency derivatives managers have been exploiting the difference between specified pools of mortgages and pre-announced pools (TBAs) which have faster prepayment rates.”

FRM expects technical strategies, as well as those which are liquid and market neutral, to perform best in the current environment.
 


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