The Reason Behind These Two Hedge Fund Strategies’ Turnaround Is Not What Most Investors Think

After years of getting crushed, equity quant and risk premia are back— at least for now.

Amir Hamja/Bloomberg

Amir Hamja/Bloomberg

A turnaround is in the offing for investors in quantitative equity and risk premia strategies, which have underperformed for years.

Equity quantitative strategies returned 6.4 percent through the first half of 2021, putting them on track for the category’s best full-year performance since 2017, according to hedge fund research and analytics firm PivotalPath. Risk premia strategies gained 8.5 percent for the same period, after losing 11.3 percent in 2020, according to the firm. This likewise puts risk premia on track for its best performance, on a full-year basis, since 2017.

Although many hedge fund managers benefitted from good calls on health care and technology stocks over the pandemic period, those bets didn’t drive the turnarounds for these two categories.

“One thing that explains so much of recent outperformance across all the different strategies over the last year is the shift back to value,” said Jon Caplis, CEO of PivotalPath. “Hedge funds did well in 2020 and if you ask investors why, most will say they got health care and technology right or what we call social distance winners and losers.”

But when Caplis analyzed the data that PivotalPath collects from hedge fund managers, that’s not what drove the outperformance of equity quant and risk premia strategies.


Despite the perception, “most hedge funds aren’t market timers, they are value investors,” Caplis said. “It’s the comeback of value.”

In March and April, Caplis said many of these managers saw their own positions beaten down. Instead of fleeing the markets, they started investing more money. For instance, they started buying properties like Sea World and the beaten-down stocks of hotel chains, which suddenly had no customers. “The data says, look, hedge funds continued to do what they do,” the CEO said.

PivotalPath’s value basket has outperformed growth by 12 percent year-to-date. This is the first time that value has outperformed growth in a calendar year since 2016, according to the firm. In line with value’s comeback, PivotalPath’s financials index was up 14.6 percent in the first half, and energy hedge funds were up 11.9 percent after some massive down years for the category, according to the firm.

Last year, PivotalPath’s equity quant index was down about 5.5 percent, after having lost 0.2 percent in 2019 and 1 percent in 2018. In 2016 and 2017, the index was up 3 percent and 7.4 percent, respectively.

Investors in equity quant should benefit from the recent turnaround, as even after multiple years of disappointing performance, people generally hung on to their funds. PivotalPath’s equity quant index represents about $150 billion in global investments.