Human-Run Hedge Funds Beat Quants In Pandemic

Hedge funds that use complex, automatic-trading strategies have been beating human stock-pickers for several years. But that all seemed to change in 2020, as wild market swings in all asset classes, driven by the virus-pandemic, along with an unprecedented flood of central bank money into capital markets has resulted in a year where human-run hedge funds trounced quants, according to Bloomberg

Many of these so-called quants - Renaissance Institutional Diversified Alpha, Odey European, QAR Global Stock Selection, and Bridgewater Pure Alpha II - are expected to record significant losses this year as the March stock market crash upended their computer trading models. 

Source: Bloomberg

Meanwhile, human-run funds logged in some of their best returns in a decade, including Saba, Pershing Square, and Whale Rock. 

Source: Bloomberg

John Thaler, an equity manager at Hampton Road Capital Management, said, "stock-pickers had several years of self-inflicted under-performance in the past decade, and the narrative was that computers had defeated humans."

"Then, the quants hit an air pocket of tough relative performance, and this year, long-short equity managers outperformed by an enormous amount," Thaler added. 

The bigger winners this year, as we noted, are the "13-year-old Robinhooders" who outperformed everyone. 

In June, Goldman Sach's David Kostin wrote that institutional clients were becoming increasingly angry about how their relative portfolio performance fell behind retail investors. 

Andrew Beer, the founder of Dynamic Beta, said designing trading strategies based on decades of numbers "don't matter today might well be a fool's errand." 

"This year should call into question some quant strategies," Beer warned. 

Even before the pandemic swoon in markets, "quant funds were already starting to struggle under the weight of their own success. Several had amassed tens of billions of dollars in assets, meaning market inefficiencies detected by their high-speed computers tended to vanish before they could make much money from them," Bloomberg noted. 

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