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Quant Hedge Funds Stake Their Claims

Systematic strategies saw 29 percent of hedge fund industry inflows over the last seven years, according to a Barclays report.

Hedge funds with quantitative strategies are pulling in more than their weight.

Systematic strategies have taken “almost twice their fair share” of hedge fund allocations since 2010, according to a Barclays prime services report this month. Quant funds attracted $114 billion, or 29 percent of total inflows over the last seven years, despite accounting for only 17 percent of hedge fund assets under management.

That’s the largest slice of the industry such funds have represented in the past decade, with about $500 billion of assets last year. Quant managers will probably continue to benefit from a decline in “algo aversion” as investors increasingly accept systematic strategies, according to the report.

“Investors are overwhelmingly in favor of growing their systematic allocations in the short term,” Barclays said in the report. “Recent inflows have tended to favor systematic managers – particularly equity quant.”

The firm expects that 54 percent of investors to embrace equity quant strategies this year, up from 48 percent last year. Thirty-six percent of investors had algorithm-free portfolios in 2016, the firm said, estimating the proportion without allocations to systematic strategies would decline to 30 percent this year.

While quant funds are becoming more popular, Barclays said their performance has not been much better than the whole hedge fund industry. The firm found “very little to differentiate” equity quant funds that are market neutral from discretionary hedge funds, though systematic funds tended to outperform their discretionary peers during equity market corrections. They also offer lower correlation to other equity and hedge fund strategies.

Barclays said that more than half of the systematic managers it studied were investing in new tools like big data and machine learning in an effort to improve their investment processes. Although these techniques come with their own challenges – including the cost of acquiring data and assessing which data sets are actually useful – the “meaningful level of capital that managers are starting to deploy toward such initiatives ... offers a clear indication of the importance that managers are attributing to new data sources and the pivotal role they will play in the future.”

Even more traditional hedge fund managers are increasingly adopting quantitative techniques, Barclays added, resulting in a surge in what they termed “quantamental” managers.

“While systematic hedge fund strategies continue to remain a minority of the overall hedge fund industry assets under management, there are numerous signs to indicate that they may be in for sustained growth in the short and long term,” Barclays said in the report.

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