This year is adding to growing doubts over ARP, which has lagged stock indexes in recent years but has also posted a mixed performance as a portfolio diversifier. While defenders would argue that these products were never supposed to be a hedge against traditional assets, many investors likely got a different impression from their marketing, says MJ Hudson’s Suhonen.
That disappointment has now spurred something of an industry reckoning, with some quants tweaking models while others adopt a fundamental re-think. At Unigestion, for example, the team has added a momentum signal that makes sure the fund isn’t putting too much money in losing strategies, investment manager Joan Lee says.
On Wall Street, where investment banks sell ARP strategies individually as swap products, the response has been to churn out an ever wider range of indexes for clients. If the old ones are struggling, at least there are new ones on offer, the thinking goes.
Guillaume Arnaud worries that the quant strategies long documented by academics have now become too crowded in today’s market. At Societe Generale SA, he and his team have been touting lesser-known strategies, such as one that takes advantages of the gap between short- and long-term repurchase agreements.
“Premia that are less researched or implemented can prove to be a bit more juicy,” said Arnaud.
JPMorgan Chase & Co.’s Arnaud Jobert, who runs the equity side of bank’s Investable Indices franchise, says the bank has also expanded its menu into more sophisticated ARP strategies. That’s helped contribute to the nearly three-fold increase over the past three years in the number of indexes on sale to about 4,000 currently, according to a person familiar with the matter.
While many in the industry are soul searching, there is always the possibility that poor performance is cyclical. For some quants, now might be the best time to bet on lagging strategies.
“At some point we do think there is a tremendous amount of money to be made as fundamentals return back to equity markets and value and other factors start performing,” said Deepak Gurnani, founder of ARP Investments in New York. “However, the timing is somewhat uncertain.”
This article was provided by Bloomberg News.