GAM’s Bet on Hedge Fund Sours as Quant Business Shrinks

(Bloomberg) -- GAM Holding AG’s push into cutting-edge hedge funds has faltered, after steep losses at its once-feted Cantab Capital Partners unit accelerated a plunge in assets this year.

GAM’s acquisition of Cambridge, U.K.-based Cantab was supposed to supercharge its expansion into computer-driven quant trading. But key strategies have posted losses of as much as 24% this year, dragging assets down to an all-time low of $1.3 billion. The former Cantab funds have shrank by two thirds since the 2016 acquisition, with the worst losses fueled by the pandemic, according to investor letters seen by Bloomberg.

With strong ties to the world-famous Cambridge University, Cantab was already one of the best-known names in quant investing when GAM paid more than $200 million for the firm and its $4 billion of assets. Alexander Friedman, then GAM’s chief executive officer, said at the time that Cantab was the “perfect partner” whose “cutting-edge technology” would help the Swiss firm tap into the booming investor interest in quant funds.

But instead of fueling growth for their new owner, the former Cantab funds struggled to raise money and clients began to pull out. GAM was hit with a $59 million impairment charge in 2018 when assets and cash flows were less than forecast. The deal came in for criticism from shareholders including RBR Capital Advisors AG, which called it “misguided” and “extremely expensive.”

The GAM Systematic Multi Strategy fund, once Cantab’s flagship, runs two versions: the higher-risk product lost nearly 24% in the first nine months of this year, while the lower-volatility alternative was down 12.4%. Another former Cantab product, the Core Macro fund, has fallen by 6.5%.

This performance has helped drag the assets of GAM Systematic, the firm’s quant investment arm, down to $3 billion, the lowest ever disclosed and 45% below the peak a year ago.

“It didn’t really turn out as they expected,” Andreas Venditti, a senior analyst at Vontobel, said of GAM’s purchase of Cantab. The Swiss firm “used to be extremely well capitalized; basically they spent most of it on this acquisition, and in hindsight that has flopped.”

The slump in its quant unit adds to GAM’s struggles to stem client flight, which were compounded by the 2018 suspension of star trader Tim Haywood. The firm’s clients pulled 2.4 billion Swiss francs ($2.6 billion) from its investment-management business in the third quarter of this year. Group assets under management were little changed in the period at 120.4 billion francs.

Most of GAM Systematic’s asset drop has occurred this year, at a time when many quant hedge fund firms are struggling during the pandemic-fueled volatility. Some of the industry’s biggest names have lost money, including Bridgewater Associates, Renaissance Technologies and Winton. Investors pulled $21.4 billion from computer-driven hedge funds through September, according to Eurekahedge.

Simpler Options

Yet lower-cost options are still pulling in investors’ cash. Man Group Plc, the world’s largest publicly traded hedge fund firm, reported $1.7 billion of net inflows in the third quarter, the highest in almost two years, driven by an influx of new money into lower-margin quant strategies.

A similar dynamic can be seen at GAM Systematic.

Its former Cantab funds use complex mathematical models to bet across asset classes. They also charge higher fees than the Alternative Risk Premia fund, which was developed by GAM Systematic itself under current unit head Anthony Lawler. This fund relies on simpler models to make bets based on well understood factors such as the volatility of stocks and the profitability of companies.

And unlike the former Cantab funds, the in-house Alternative Risk Premia fund has seen assets surge more than eight-fold since 2016 to $1.7 billion. It’s down 4.7% this year through September.

“The dominant factor here has been industry trends and investor preference,” Lawler said in an interview. “Clients have been shifting more toward what they consider simpler things.”

Over the longer term, the former Cantab funds compare favorably with peers, a GAM spokeswoman said by email. The Core Macro fund, for example, has delivered an annualized return of nearly 5% since inception, compared with just under 2% for the SG Trend Index, which tracks some of the biggest quant funds, an investor letter shows.

“Performance has been resilient and our investment strategies are well positioned for growth relative to peers,” the spokeswoman said.

Cantab founder Ewan Kirk has given up day-to-day fund management at GAM Systematic and assumed the more chairman-like role of president, according to an internal company memo seen by Bloomberg. Fund management is now the responsibility of co-chief investment officers Tom Howat, who came from Cantab, and Frederic Desobry, who joined GAM from Systematica Investments.

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