John Rachmat spent three years researching, backtesting and tweaking his quantitative investment model before he was convinced he had a winning formula.
It took less than four months for the market to put his portfolio to the test.
The former sell-side strategist, best known for accurately predicting the last two bear markets in Indonesia, has dropped near the bottom of the country’s performance rankings after his fund’s ill-fated move to turn bullish on mining stocks shortly after it began trading in mid-2018.
The timing could hardly have been worse. About a day after the fund boosted its weighting in equities to nearly 80% from 2%, with a heavy emphasis on coal companies, a surprise government statement on domestic sales quotas sent the industry tumbling. As his losses surpassed 10%, Rachmat was compelled to intervene: He took some decision-making power back from the algorithm.
“We decided to use a degree of subjective judgment,” he said, adding that he remains confident the fund will perform well over the long term.
Rachmat’s experience illustrates the rocky transition that many asset managers face as they shift toward computer-driven trading strategies that proponents have extolled as the future of investing. Despite their promise, quant funds globally have delivered uneven returns in recent years as they’ve struggled to cope with market volatility. Investors pulled $8 billion from the category in the first four months of 2019, after withdrawing $19 billion in 2018, data from eVestment show.
Rachmat, 52, started experimenting with quantitative models during his time at PT Mandiri Sekuritas, the brokerage arm of a state-run Indonesian lender.
It was there that he earned the nickname “Mr. Bear’’ for his willingness to issue sell calls on the nation’s stock market -- a rarity among analysts at government-owned brokerages. His pessimistic outlooks in late 2012 and 2014 preceded declines of more than 20% in the Jakarta Composite Index.
In 2015 he teamed up with Francis Lim, then a quantitative analyst at Mandiri Sekuritas, who backtested Rachmat’s theories on what kinds of automated trading strategies might perform well in Indonesia. It was a humbling experience.
“Every single one of the numerous ideas I had was shot down by his actual tests,” Rachmat said. “None of those things actually worked.”