Q&A: FQS’s Penny Aitken Talks Manager Selection, The Changing Investment Landscape

Feb 11 2013 | 3:42pm ET

Penny Aitken heads investment research for FQS, the U.K.-based fund of hedge funds founded by former Renaissance Technology managing director (and math genius) Dr. Robert Frey in 2009. FQS, with assets under management of approximately $150 million, employs proprietary quantitative models and integrated risk analysis to manage two funds—one domiciled in Delaware, the other in the Caymans—investing in the same underlying managers. Aitken, whose CV include stints at International Asset Management, Tisbury Capital Management, Bradshaw Asset Management and Cazenove, recently corresponded with FINalternatives Senior Reporter Mary Campbell. Here is what she had to say. 

FQS combines qualitative and quantitative analysis in manager selection, can you tell me something about these processes and how they work together?

We have created a manager selection process with our quantitative and systems expertise at its core. We deploy our cutting-edge, proprietary quantitative tools and techniques to filter the hedge fund universe in a variety of original and innovative ways. Powering the process is our unique factor model that has been researched and developed by our founder and extensively tested in a live portfolio by the team over the past three years. In summary, it provides the ability to decompose hedge fund returns and differentiate systematic factors from alpha: luck from skill. We lever off our singular quantitative heritage to create these powerful tools to provide unique insights that both test and complement our evidence-based qualitative work.

Dr. Frey created a web-based program for analyzing hedge funds that he claimed could separate “the lucky from the skilled.” Has that program proved effective?

We are a firm that is committed to continuous improvement: R&D is an integral activity. We also believe strongly in evidence: we are constantly testing our process and tools to gauge the quality of our decision making. While we are still at an early stage as a business and in portfolio track record, results to date are very compelling at revealing our ability to both understand and manage risk at both single manager level and in a portfolio context. 

How many funds is FQS invested in at any one time? How often is portfolio rebalanced?

The number of funds can vary depending on capacity constraints and internal risk limits but has averaged around 30 on our current mandate. We have an individual expectation of each of our funds that is constantly monitored using our quant toolkit supplemented by qualitative insight and experience. Any deviation positive or negative is investigated and in some occasions these may trigger a rebalancing. So the process is fluid and continuous.

Where does FQS see opportunity in 2013?

We draw our views for where opportunity may lie in 2013 from the managers we meet with and other sources of primary evidence, such as investment flows. We do not make economic or market forecasts but we can make and test observations on the opportunity set from patterns detectable in our tools and models.

Critics say that funds of funds as an asset class are on their way out, as institutions become more sophisticated and invest directly—what do you see as the future for funds of funds?

The whole investment landscape is changing, not just that of fund of funds. Costs, technological advances and regulatory pressures are triggering shifts and convergence across the broader asset management industry. Businesses need to show flexibility to adapt and be able to differentiate themselves. We at FQS believe we have a unique selling point in our quantitative pedigree and capabilities. Our tools provide huge scope in our ability to listen, understand and respond to a wide range of investment needs.

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