One of the World’s Best Quant Funds Plunged 29% in March

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In December, Singapore’s Quantedge Capital Pte was celebrating one of its best-ever years. Now, it’s just rounded off its worst month in history, showing how quickly the coronavirus has upended hedge funds.

In a commentary sent to clients this month, the fund, which in 2019 grew by 70.5% to hit assets under management of over $2 billion, said early estimates showed it lost 28.8% in March. As global equities, bonds, currencies and commodities markets fell, so too did the fund’s value.

“This is the third time since our inception in 2006 that we have a monthly loss larger than 20%; the other two being October 2008 during the global financial crisis and June 2013 during the taper tantrum,” Quantedge wrote. “While our long-time investors will not find the loss surprising, many of our newer investors who have not gone through past drawdowns with us may find this month’s returns disconcerting.”

Quantedge’s pain is symptomatic of its willingness to take risks -- a strategy that helped the 13-year-old fund deliver annualized returns of 22% until February. And it’s far from alone; many hedge funds around the world struggled last month as financial markets sold off.

In Asia, high-risk, high-return funds that cater more to wealthy individuals who can stomach losses in volatile markets, like Quantedge, were a particular drag on regional performance. The Eurekahedge Asian Hedge Fund Index fell 7.5% in March versus a 4.9% drop in the U.S. and a 6.5% decline in Europe. Only around one-third of Asian funds in Eurekahedge’s database have provided March returns to date.

“Some of these guys have tended to operate with a high-risk appetite compared to your average hedge funds, which means in good times when their convictions win out they win big,” Eurekahedge head analyst Mohammad Hassan said. “But if you’re operating at 25% to 35% volatility targets and the markets go down the way they have, then of course you’re going to be in for losses.”

World’s Not Ending

Hassan said the relative preference for equities-based strategies among Asian hedge funds meant more suffered when markets tanked.

“The crucial thing is how much nerve investors have,” said Hassan. “If you have to start liquidating to meet investors’ cash requirements then you can’t play out your convictions.”

Quantedge told clients it has “aggressively” cut its position sizes but has still maintained positive exposure across all major asset classes. By doing so, it aims to reduce its ultimate losses and have a foothold for when markets recover.

Fortunately for Quantedge, 82% of its assets under management are committed for three or more years, meaning investors can’t withdraw on a whim and the money can continue to be invested. Hassan said funds like these would be the first to bounce back if markets improved.

“It is not unexpected to witness the widespread liquidation of assets if investors think that the world as we know it is going to end,” Quantedge wrote. “However, this is an irrational fear. The world, the financial world in particular, is not ending. Humanity and the world economy have endured many far worse disasters than Covid-19 and have recovered from each one without fail.”

Quantedge’s own staff aren’t immune either. They collectively represent more than 10% of its assets under management. “This month alone, Quantedge employees have lost a total of more than $75 million,” the firm said in its March update.

Quantedge, helmed by Suhaimi Zainul-Abidin, has a minimum investment of $1 million. Its website says its investment strategy is only suitable for long-term investors who can tolerate high variability in monthly returns.

©2020 Bloomberg L.P.