The investment world has a new 'haute couture'
"The 'House of Quant' has firmly established itself as the hedge fund industry's most fashionable strategy due to its high quality product," Credit Suisse said in a recent note to investor clients.
The note is being cute here, but what it is describing is a shift in the hedge fund world towards quant funds, or funds driven my computers and mathematical models, as opposed to those funds which are driven by human traders.
"As Haute Couture, these funds create portfolios from an inventory of tailor-made fabrics or style factors, stitched together with highly calibrated tools," the note said.
This is a reference to so-called investment factors, which are things like yield (stocks that pay out dividends) or low-volatility (stocks that don't move around too much). Quant funds often trade these factors, as opposed to sectors.
"Today's premier Quant funds have moved beyond the Size, Quality, Momentum style factors popularized by Barra/MSCI, instead creating their own factors as new raw materials to drive their investment process," the note said.
These funds seem to have momentum on their side, enjoying a strong performance in May, according to Credit Suisse. They're also proving popular with hedge fund investors.
According to Credit Suisse's annual institutional investor survey in March, investors in hedge funds favor strategies like quantitative equity market neutral, while they are negative on funds that bet on corporate bonds and global macro funds which take broad bets on the economy across asset classes.
Quant funds have slowly been taking over traditional Wall Street jobs, with an increasing number of top-earning hedge fund managers being those that rely on computer programs than pure brains.
Institutional Investor just released its annual list of the top-earning hedge fund managers in May, and six of the top eight were quants. That includes Ken Griffin of Citadel, Jim Simons of Renaissance Technologies and John Overdeck and David Siegel of Two Sigma.
Leda Braga, the first woman ever to have made the cut to Institutional Investor's annual list, is also a quant, while Bridgewater Associates, the biggest hedge fund in the world, now has a former Steve Jobs lieutenant as co-CEO and wants to extend "the systematized decision-making" used in investing into management.