Meanwhile in credit, last year marked the first time since at least 2012 when all quant factors tracked by Goldman underperformed cash. At one point about 60% of investment-grade bonds yielded less than cash, making it hard to churn out outsize returns, according to Goldman’s Karoui. Further complicating matters was a sudden shift in market narratives as the focus switched between a recession and a soft landing.
“That’s very difficult considering the many episodes of volatility that we had in 2023,” he said. “It almost created a bit of a smoke screen for the factors.”
The whiplash was particularly painful for a breed of quants known as commodity trading advisers that surf the momentum of asset prices through long and short bets in the futures market. A Bloomberg CTA index dropped 6.8% last year.
That performance is all the more disappointing because CTAs often park large chunks of their assets in interest-earning cash, since their derivative-based bets rarely need to be fully funded. That means returns are a combination of trading profits and interest income, and should theoretically be mechanically higher.
The era of higher rates has been a boon for some systematic strategies and managers. Carry trades — which profit from interest-rate differentials — have seen better returns as spreads widened with borrowing costs, for one. The surge in Big Tech stocks powered the growth factor higher.
Quant giant AQR Capital Management posted a stellar 18.5% return in 2023 on its Absolute Return strategy, which combines its various trades. Izzy Englander’s firm Millennium Management gained about 10%. D.E. Shaw & Co.’s biggest hedge fund returned just under 10%.
Nonetheless, as cash rates have risen, so have investor expectations. A BNP Paribas survey released October showed them targeting annual returns for their hedge-fund investments of 9.75%, up from 6.85% previously. About 90% of investors said the hurdle rate — a threshold managers must cross before charging performance fees — should be anchored to the risk-free rate or a relevant benchmark.
To Neal Berger, founder of Eagle’s View Capital Management, things are already changing. His firm, which advises clients on hedge-fund allocations and runs a multi-manager fund of niche strategies, is now looking for double-digit returns, up from about 8% in the low-rate days.
“There is a viable argument for certain strategies that have become more attractive, that benefit from the higher interest rates,” he said. “But at the end of the day, everybody has to earn a spread above risk-free in order to attract and retain investors.”
This article was provided by Bloomberg News.