Obscure Hedge Fund Leaves Sleepy Swiss Town and Trounces Rivals

(Bloomberg) -- In 2017, Patrick J. Aregger took over an obscure hedge fund based in a sleepy Swiss town. He moved its base to Zurich, shook up operations -- and trounced the trend-following competition.

Quantica Capital AG’s flagship fund is up 26% in 2019, compared with a 9% gain for an index of commodity trading advisors, a breed of quant that uses futures contracts and typically surfs market momentum. In September the firm attracted about $100 million of new money, taking assets under management to $550 million.

For the chief executive officer, the outperformance is affirmation of the Quantica model, which follows relative trends in prices that have been adjusted for volatility. He reckons that’s helped the team pick up on new trends quickly, allowing it to ride along with this year’s mega bond and equity rallies.

“We hear from investors, ‘Oh, you guys at Quantica are more like trend following 2.0,’” Aregger, a former manager at a unit of Man Group Plc, said in a phone interview. “We have always looked at risk-adjusted relative trends, and that is I think now coming to the benefit of investors.”

Like most quantitative hedge funds, the precise details of Quantica’s methods are proprietary, though Aregger does offer an outline: The firm standardizes and ranks the volatility-adjusted price trends of all 63 instruments it trades, helping it spot any shift in the relative dynamics between assets.

The Managed Futures program of the Swiss firm -- whose former base was in Schaffhausen -- returned 76% over 10 years through August, compared with 32% for the SG Trend Index.

At the end of 2018, Quantica’s computers turned positive on U.S. equities before their supercharged recovery this year. When many CTA models were still mired in the fourth-quarter sell-off, the Swiss fund calculated that on a relative basis, the rebound in American stocks warranted more allocation.

The risk-adjusted model started to cut long exposure to U.S. Treasuries earlier this year as bond volatility rose. While that might have crimped Quantica’s ability to harvest that market’s massive gains, it helped the firm’s main fund escape September with just a 0.7% loss, compared with a 5% drop for the SG Trend Index.

“The largest and longest secular trend in the last 15 years has obviously been the bond trend,” Aregger said. “Then the question arises from the investor: what do you do if the trend reverses? And we’ll say, we do whatever it does. It’s not that the world will suddenly stop having trends.”

CTAs -- which Eurekahedge estimates oversee about $243 billion -- have buckled in the post-crisis era thanks to overcrowding and whipsawing trends. The cohort recorded $10.9 billion of outflows in the first eight months of 2019, after posting the worst returns this century last year according to a Societe Generale SA index.

Thanks to stronger cross-asset trends, they’re now set for their best annual gain in five years. But volatility in September, when both bond and stock rallies faltered, was a reminder of the potential risks ahead.

JPMorgan Chase & Co. strategists estimated in a Friday note that, while a short-term CTA momentum signal for the S&P 500 is still positive, for 10-year U.S. Treasuries it has turned negative. Quantica has trimmed its exposure from a 2019 peak, but it still has long positions in both fixed income and equities.

All told, Aregger’s efforts to spread the Swiss firm’s name are bearing fruit, helped by a broader revival for CTA returns this year.

“When all investors are sufficiently tired with an asset class, it may just be the perfect point when you want to get it again,” he said.

To contact the reporter on this story: Justina Lee in London at jlee1489@bloomberg.net

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Sid Verma

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