Quantitative mutual funds are struggling, with just a small portion beating the market in the first half of the year, according to research from Bank of America Corp.
The average quant fund gained 16.8 percent this year through June, Bank of America said Monday in a report on U.S. mutual fund performance. That’s two percentage points behind returns of the Russell 1000 index over the same period, the bank’s equity and quant strategists found.
In the best first half for U.S. equities since 1997, only 17 percent of quant funds beat the market, according to the report. In comparison, 41 percent of active managers focused on large-cap stocks beat their benchmarks.
Quant funds may have been hurt by “whipsawed factor returns,” the strategists said in the report. Factors are characteristics of equities which quant investors seek exposure to in an effort to drive gains. Their higher exposure to “value,” — the worst-performing factor group this year despite June’s rebound — “detracted from alpha,” according to the report.
Value strategies, which tend to outperform when profits are accelerating, had steep losses in May amid growing concerns over trade tensions and global growth, the strategists said in a report last month. “Risk” factors also performed poorly during that time, the report shows.
[II Deep Dive: AQR’s Cliff Asness Told You Bad Times Were Coming]
Cliff Asness, co-founder of AQR Capital Management, has written blogs over the past year about the quantitative investment firm’s disappointing performance. This month, he wrote that “mostly it’s a tale of woe for our equity strategies,” urging clients once again to stick with AQR through tough times.
In September, Asness wrote a long paper about how painful it was to see quantitative factor-based liquid alternatives struggling. He still defended their use as a diversifier in portfolios, suggesting that investors would be rewarded for their patience over the longer term.