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January 9th, 2013 at 5:43 pm

Quant Funds Losing Money.

We know that currency hedge funds and other similar programs had poor results last year, or over the last few years for that matter. Now it appears that quantitative (computer-driven) hedge funds as a group are also underperforming. Without a breakout out by the asset class, the Newedge CTA Trend Sub-Index declined by 3.4% in 2011. That follows an average loss of 7.9% 2011, making for sub-par returns in the last two years. This particular index tracks trend following quant funds, not the entire spectrum of computer-driven programs.

These are different from the high frequency, low latency and other variants of quant approaches, but present a good proxy for the entire complex. Certainly, this type of trading is a guarantee of profits, no matter how sophisticated it has become. Managers in some of these funds blame sudden changes in sentiment for losses last year, although it remains unclear what they faulted in 2011. Bottom line is that for all the fuss and push into computer-driven trading, these approaches are not better over time than any other method. Perhaps the problem lies with the concept – the so-called quant programs often try to exploit some inefficiencies in the market. Eventually, these tend to disappear due to either changing regulations or broader improvements in technology. The funds must come up with another “angle” or risk slipping into obscurity.

Currencies became sluggish, as if the ECB policy meeting caused anxiety among markets participants. Perhaps it did, especially since the Bank of England has a meeting, too. I will avoid new trades in both the Pound and the Euro, unless some very short-term opportunity presents itself. Trades already open will just have to ride out the meetings. Meanwhile, I am looking at the CAD-CHF, which is consolidating on the 4H chart. When this process is over, the price could easily move 60-70 pips in either direction. I have no bias and simply watch for a breakout, which could take another 2-3 trading days to develop.

Mike K.

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