Hedge Fund Collapse in Sweden Puts Spotlight Back on Quants

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As one of Sweden’s oldest hedge funds shuts its doors, its chief acknowledges the firm’s quantitative strategies failed to cope with pandemic-induced market ructions.

Lars Ericsson, the chairman of soon-to-be defunct Informed Portfolio Management, said the fund’s medium-term models failed to handle the shock that hit markets in early 2020.

“When the pandemic came, it was a total surprise for the models,” he said on Thursday. But he rejected the idea that quants have had their day. “There is definitely a future for quantitative hedge funds.”

IPM, a systematic macro fund based in Stockholm, started bleeding client money more than a year ago, with about $4 billion in assets under management flowing out since late 2019, leaving it with only $750 million. Its main owner, Swedish investment firm Catella AB, tried to find buyers until the last minute, but threw in the towel.

The fund then managed to come back from the brink, but bad trades that predated the pandemic came back to haunt the fund. Its relative equity models had been weighing on performance for years, due in part to a strategy relying on value stocks. This year, IPM’s models misjudged the relative gains in interest rates.

Ericsson says he still thinks everything would have worked out had IPM had a little longer. As recently as half a year ago, it even hired some people from Goldman Sachs to help build out its business. But client withdrawals were too intense, and the fund had to give up.

“We were about to add some short-term factors, which would have been good diversifiers,” he said. “But unfortunately, we won’t get that chance now.”

Industry in Decline?

IPM joins a growing list of hedge funds shutting down in recent years as investors rethink their allocations to the industry. More hedge funds have closed than started in the last six years, with 770 of them shuttering in 2020, according to data compiled by Hedge Fund Research Inc.

Last year was particularly tough for computer-driven quant funds, including behemoths such as Renaissance Technologies, Winton and Two Sigma.

IPM’s systematic macro strategy applied fundamental macroeconomic principles to rank asset classes and economies. It then allocated money across asset classes including sovereign debt, equity indexes, commodities and currencies across the world. The model was based on historical statistical data, and relied heavily on computers. Year-to-date, its systematic macro fund generated a negative return of 7.7%, according to data compiled by Bloomberg. For all of 2020, the return was minus 3.8%.

Jonas Thulin, who oversees $6 billion as head of asset management at Erik Penser Bank AB in Sweden, says Ericsson is right to defend quant strategies, despite IPM’s demise. However, Thulin, who’s been able to increase assets under management roughly fourfold since 2018 using macro strategies, says quant models become dangerous when applied too narrowly.

The Killers

“The usual killers of quant strategies are so-called paradigm shifts and shocks,” he said.

Thulin says the way around this is a methodology he calls “dynamic macro.” The idea is that asset managers “constantly run parallel universes of historical relationships and explanatory variables and structures.” Part of the idea is also that the model isn’t used to predict the future, “but rather, the market’s perception of the future,” which requires a human sanity check.

That approach helped Thulin deliver a 26% return over the past year on his firm’s multi-asset portfolio, compared with the 5-7% annual return it targets. The global stocks portfolio he oversees is up 39% over the period.

Ericsson notes that the long-term trend suggests that the share of total assets being managed under quantitative strategies is increasing, “even though there may be a temporary setback now.”

But for IPM, “assets under management decreased faster than we had expected and with that asset base it is difficult to maintain the quality we want.”

©2021 Bloomberg L.P.

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