AlphaQuest Has Had a Rocky Decade. Its Founder Has Seen Worse.

Nigol Koulajian (Illustration by Jeremy Leung/II)

Nigol Koulajian

(Illustration by Jeremy Leung/II)

A macro hedge fund lives on.

Nigol Koulajian’s youth was quite different from those of most other hedge fund managers. Sitting recently in a quiet Italian restaurant on New York’s West 4th Street on a cold winter evening, Koulajian calmly explained an unsettling past: “When you’re a kid and you need to regularly escape to a bomb shelter to survive mortar shelling and bombings, it affects you for the rest of your life.”

His extended family is part of the Armenian diaspora that fled Turkey in all directions in the early 20th century, when the country’s brutal assault of ethnic Armenians began. His father’s side of the family ended up in Beirut — the Paris of the Middle East, or so Koulajian was told. But while he was growing up in the 1970s, Lebanon dissolved into civil war.

“My own family history, and what I saw when I was young, informed me that life can go very wrong, very quickly,” the hedge fund manager says. “Human tendency is to underestimate low-probability events.”

This view goes a long way toward explaining Koulajian’s investment strategy, which strictly limits investment horizons, targeting inflection points when the rest of the market hasn’t yet recognized trends that might be reversing.

To accomplish this, the 51-year-old manager focuses on spikes in price volatility instead of macroeconomic data, believing the former metrics are a more efficient way to profit over the long haul. He also believes his approach avoids the hazards of buy-and-hold strategies that expose investors to greater uncertainty.

The result is a defensive fund that has lagged stock markets during rallies and delivered outsize returns when assets were swooning.


AlphaQuest won’t disclose the secret sauce of its proprietary modeling. But in tracking equity and bond indices, commodities, and foreign exchange across 80 global markets, the firm’s systems are an amalgam of past and current data points followed over various time frames, ranging from a few hours to several months. Among a host of other refinement processes, the firm then overlays trends and themes, behavioral factors that contribute to outperformance and underperformance.

Alpha Quest Original (AQO) — the flagship strategy — managed $1.4 billion at the end of 2018. The program’s models place 1,500 limit orders for a wide range of futures contracts every day, with 10 to 20 percent of these orders getting executed daily as limit prices are hit. Models also establish preset sell and stop-loss orders free of discretionary decision-making that could be affected when racking up gains or losses.

Because futures markets are open 24 hours a day during the business week, the firm always has traders at the helm to sign off on every transaction.

The typical investment horizon ranges from several business days to several weeks, with eight days being the average duration.

The success of this approach was most recently demonstrated after the passage of the massive U.S. tax cut bill in December 2017, when the market started 2018 with a rush. The breakout triggered the fund to ramp up U.S., European, and Japanese equity exposure from 50 percent of the fund’s net asset value to 190 percent by January 10. By the end of January, the fund was largely out of these positions.

In February the market reversed course, and by the end of the first quarter, it had given up all of the year’s gains. But the fund was up more than 16 percent, aided by long positions in crude oil, short positions in Italian bonds, and long stakes in safe-haven bonds such as German bunds, and being short the U.S. dollar.

Constant repositioning in and out of markets has helped AQO consistently deliver absolute returns. From its inception in 1999 through December 2018, the AQO fund realized net annualized returns of 10.4 percent, outpacing the S&P 500 by an average of 5 percentage points a year.

The fund’s annualized volatility is significantly higher than the market’s because AQO’s performance on both the upside and the downside is concentrated in periods when price movement is more extreme. During the dotcom bubble, AQO gained 135 percent while the market was down by more than a third. And when the financial crisis struck, knocking 37 percent off the S&P 500, AQO gained 59 percent.

The fund’s worst drawdown is just about half that of the market’s, and AQO has had only four down years out of 20, none worse than 13 percent. No surprise to find the fund uncorrelated to the market and even to its global macro peers.

But AQO has an Achilles’ heel: bull markets with low volatility. During quarters when the market was up, the fund trailed it by more than 4 percent a quarter. And from early 2009, when the market started to rally from the nadir of the financial crisis, through September 2018, the fund has realized an annual net return of 6.12 percent, versus the S&P 500’s 17.04 percent.

Among its peers, the fund wasn’t alone in trailing the market big-time. According to industry data tracker BarclayHedge, the average global macro fund has generated annualized returns of just 2.64 percent over the past nine years. The closely aligned category of systematic commodity trading advisers, or CTAs, actually lost money.

These poor averages have spurred a number of managers to materially alter their strategies over the past half-dozen years, says Mike Franke, a senior research analyst at consulting firm FEG Investment Advisors. Such funds abandoned market hedging to instead rise with the tide.

But AlphaQuest has largely stuck to its convictions, even through the gutting year of 2017.

The S&P 500 climbed nearly 22 percent that year, with the lowest volatility in decades. In August, for example, news broke that North Korea had fired missiles over Japan. “That should’ve rattled markets,” argues firm president Prashant Kolluri, “but there was very little price movement across asset classes.” Four times that month, AQO established equity positions, only to be proven wrong immediately. The fund lost nearly 13 percent in 2017 — its worst year ever.

AQO’s protracted underperformance may explain why its assets haven’t soared over time. Macro and CTAs have struggled to raise money during the bull market. And the program’s stable investor base, with 44 percent of assets from pension funds, 14 percent from family offices, and 13 percent from foundations, has helped management stay committed to its beliefs.

However painful the string of low-return years has been, Rick Weeks, chief investment officer of $1.4 billion advisory firm VWG Wealth Management, sees this performance within a larger picture. “AQO’s returns over the last two decades bear out a basic truth: Long-term performance is more geared to how assets perform during market shocks than how they fare during long-term run-ups.”

Fund managers are invariably stamped by the market environment in which they cut their teeth. Koulajian arrived in the U.S. in 1984, toward the end of one of the worst drawdowns Wall Street had ever known.

He studied electrical engineering at Notre Dame, then took a job at Andersen Consulting (now Accenture). As part of a quant team working with Salomon Brothers in 1991, Koulajian found his calling: marrying quantitive skills with investing.

That was the era of swashbuckling global macro players like George Soros, Julian Robertson, Michael Steinhardt, and Paul Tudor Jones. They didn’t need bull markets to reap fortunes, because macro managers don’t have directional biases that restrict investments.

After going to Columbia Business School in 1994, Koulajian took jobs at various hedge funds and funds of funds to gain hands-on experience and to connect with sources that would seed his plans. He picked the brains of leading systematic managers, such as Mint Trading and Commodities Corporation. He observed that most systematic managers were thinking about and processing data in much the same way, largely focused on long-term trend following. “No one, however, was looking at shifting volatility,” he notes. He sensed an opportunity.

“One of the things that philosophically jumped out at me,” recalls Koulajian, “is that when managers become successful — including quants — they tend to become complacent, failing to anticipate that reality does change.” He felt long-term trend following would leave portfolios vulnerable to sudden shifts in market volatility.

Contrarian by nature, the manager has found that it’s important to challenge his own perception of reality. “I try to avoid the habit of seeing only the things that reinforce what I believe to be true,” he explains.

AlphaQuest Partners opened up shop in 1999, and technology, media, and telecommunications stocks collapsed the following year. As equity investors got slammed, Koulajian’s fortunes soared.

The company’s staff of 20, with 11 professionals, works out of the same modest midtown New York office it started in. A meditation room lies adjacent to the central trading floor. The simple, windowless, rectangular space contains six black Zen meditation cushions and a small brass gong.

Koulajian says he meditates every day, and his collection of gongs now exceeds 100 — many of which can be found throughout the office. The purpose of meditation, he explains, “is to override, cleanse, and reset the nervous system, promoting deep relaxation.” He believes this daily ritual gives him an edge in dealing with noisy markets, avoiding abrupt decision-making, and staying within his core beliefs while course-correcting his models.

Koulajian has not ignored the new normal that asserted itself following the financial crisis, when major central banks took interest rates to virtually zero and flooded economies with liquidity. Modifications to AQO’s models helped the program substantially outperform its peer group.

One change Koulajian’s team made that gives it an edge was to focus on “trend crowding,” which occurs especially when large CTAs pile into the same positions.

Explains Kolluri: “The popularity of low-fee, smart-beta trend-following strategies and consequent inflated asset levels of some managers have led to increased crowdedness of specific markets, signals, and time horizons.” He notes that AlphaQuest has exploited these distortions, helping it to outperform its systematic peers.

AQO’s models began targeting much shorter-term trades, ranging from just a few hours to several days, to more effectively capture price breaks that have become more ephemeral. This has helped the fund profit from short-term spikes in the VIX and from mean reversion movement.

“While significantly trailing the S&P 500 for this long of a period is disconcerting,” says Jonathan Kanterman, an industry consultant and former hedge fund of funds managing director, “the more important consideration is how a fund performs relative to its strategy average because institutional investors must look beyond stock funds to create a diversified and more secure portfolio.”

Placid markets have been a thorn in AQO’s side, but Koulajian sees a better — rougher — environment ahead. The U.S. Federal Reserve’s quantitative tightening and interest rate bumps are removing cushions that have smoothed a decade-long equity and debt rally. This situation, coupled with unorthodox leadership in Washington, leads Koulajian to expect investor nervousness and price shocks. This should be fodder for the fund.

As we ended our Italian meal with an espresso and anisette, I asked the hedge fund manager if he could have imagined the arc his life has taken.

“I was lucky to have escaped a very dangerous place. I did so with the conviction I would try to limit uncertainty around me. I can’t forget what I saw.” With a reticent smile, Koulajian adds, “Maybe in some ways, that’s been a good thing.”