A new study is forecasting that Asian institutions will sharply raise their allocation to quantitative strategies after finding just a third are invested in them, compared with 82% for their US peers.
Among the Asian institutions invested in quant strategies, about 30% plan to make more use of them over the next three years, according to the Greenwich Associates survey commissioned by BlackRock. It finds their interest in quants is growing.
This compares to relatively slower growth in the US, where 83% of institutions invested in quants are expected to maintain their level of exposure over the next three years. Of those that do not have quant investments (18%), a quarter say they will look to invest in quants in the near term.
Asian investors are largely satisfied with their quant investments, with half saying these strategies meet expectations, while 33% feel they fall short and 17% indicate they exceed expectations.
The study attributes investor dissatisfaction to mis-marketing of quants by some managers as absolute return products that would deliver strong returns regardless of external market conditions.
The study quotes a Japanese pension fund representative as saying: “We had expected stable performance from our quantitative investments even in volatile markets, but it did not happen after [the] Lehman shock. The future of quantitative investment depends on asset managers’ efforts to improve their models.”
For the purpose of the study, quants are broadly defined as strategies that use models to devise an investment approach, and include equity market neutral, event driven, systemic macro, correlation and volatility arbitrage.
In general, quants use proprietary computer-driven strategies based on algorithms that select portfolio constituents, with commodity trading advisor (CTA) and macro funds being the most commonly known.
The relatively low market correlation of quants makes them attractive during bear markets or volatile trading periods, with 86% of Asian investors surveyed indicating that they used quants to diversify their sources of return.
BlackRock, the world’s largest money manager overseeing $3.9 trillion, has a vested interest in quant strategies, both as a manager of quant programmes and an investor into hedge funds.
Its BGI unit runs a range of quantitative equity funds, while its iShares brand is one of the biggest issuers of exchange-traded fund products that include quantitative equity ETFs. The latter selects stocks using propriety research – in the form of a ‘quant screening’ process – instead of tracking an index.
During a recent visit to Hong Kong, BlackRock chief executive Larry Fink espoused ETFs as an instrument to gain exposure to bull markets.
On the other hand, BlackRock runs fund-of-hedge-fund strategies which include tailor-made portfolios for clients that include institutional investors.
While all the Asian quant investors in the Greenwich Associates survey were invested solely in global quant funds, there are indications that regional quant strategies are benefitting from positive investor sentiment.
An Asian hedge fund industry executive observes that investor sentiment for quants has been growing over the past two years as regional strategies have been able to demonstrate an ability to deliver non market-correlated performance.
The outlook has benefitted a few Asia-based quant managers, which have seen a ramp-up in AUM in the past year. They include the SinoPac Multi Strategy Quant Fund, run out of Hong Kong, which is understood to have grown its assets by 75% in the past five months to about $55 million; and Singapore’s Quantedge Global Fund, which is expected to reach $1 billion in AUM this year, up from $323 million in mid-2012.
The Greenwich Associates survey of 44 institutional asset owners was equally divided between institutions in the US and Asia, and includes pensions, sovereign wealth funds, insurance firms, endowments and foundations.