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Renaissance, Two Sigma Drop as Quants Navigate Chaos

Katia Porzecanski and Hema Parmar
·4 min read

(Bloomberg) -- Two of the hedge fund industry’s quantitative powerhouses are getting tripped up this year as wild markets throw off their investing models.

Renaissance Technologies, which manages the world’s biggest quant hedge fund, and Two Sigma Advisers have seen losses across several of their funds in 2020, a sign of how unprecedented market volatility caused by the Covid-19 pandemic hurt even the most sophisticated traders.

Stocks sank into the fastest bear market on record in March before staging a rebound not seen in nine decades. The CBOE’s volatility gauge has averaged 33 since the end of February, 14 points higher than the average over the prior 30 years. That upended performance from firms that in recent years have been among the best on Wall Street.

“Quants rely on data from time periods that have no reflection of today’s environment,” said Adam Taback, chief investment officer of Wells Fargo Private Wealth Management. “When you have volatility in markets, it makes it extremely difficult for them to catch anything because they get whipsawed back and forth.”

Renaissance saw a decline of about 20% through October in its long-biased fund, according to a person familiar with the matter. The $75 billion firm’s market-neutral fund dropped about 27% and its global-equities fund lost about 25%.

The firm, founded by former codebreaker Jim Simons, told investors that its losses are due to being under-hedged during March’s collapse and then over-hedged in the rebound from April through June. That happened because models that had “overcompensated” for the original trouble.

“It is not surprising that our funds, which depend on models that are trained on historical data, should perform abnormally (either for the better or for the worse) in a year that is anything but normal by historical standards,” Renaissance told clients in a September letter seen by Bloomberg.

The firm said it has redirected additional personnel to work on the funds, and that its leadership “made it clear to the research staff that understanding and addressing the situation with these funds is our company’s highest priority.”

Two Sigma saw its risk-premia strategy lose 11.5% this year through last month, according to documents seen by Bloomberg. The $58 billion firm’s absolute-return fund declined 2.7%, while its absolute-return macro fund slumped 23%.

Spokesmen for the firms declined to comment. The S&P 500 was up 1.2% this year through October, and had gained 2.8% on a total return basis.

November Bruising

For quantitative funds that specialize in so-called factor-investing -- picking securities based on traits such as recent performance or volatility -- November may have added to the bruising, according to Neuberger Berman Group’s Ian Haas who oversees quantitative and directional strategy research.

“This could be a very bad month” for firms that had been betting on so-called momentum stocks, he said, based on preliminary performance data from some of those hedge funds on Nov. 9. That’s when Pfizer Inc. announced the results of its vaccine trial, which spurred a rotation out of super-sized tech companies that had been benefiting from the pandemic and into value stocks.

Quant Shock That ‘Never Could Happen’ Hits Wall Street Models

Even for a firm such as AQR Capital Management, which was tilted toward value stocks in some of its portfolios, the pullback from momentum exposure was too big to overcome. The shift added to losses for the AQR Equity Market Neutral Fund, which was down 19% this year through Monday.

Quantitative hedge funds lost about 8.4% this year through last month, according to Aurum Funds, which tracks 480 computer-driven hedge funds. Those losses were led by equity market neutral funds which plunged 16.3% during the period, the data show. The hedge fund industry, broadly, has returned about 1.2% this year, according to Aurum.

Some quant shops performed better this year. D.E. Shaw’s main hedge fund, The Composite Fund, made about 0.4% in October, bringing gains for the first 10 months to about 15%, according to people briefed on the matter. Its macro-oriented Oculus Fund jumped 2% in October, extending 2020 gains to 23%.

Leda Braga, the quant manager who spun out of BlueCrest Capital Management, saw her flagship fund at Systematica Investments turn positive this month, according to investor documents seen by Bloomberg.

Her BlueTrend strategy, which uses computer-driven models to bet across asset classes, had been down 1.8% this year through October, before gaining 4.2% in the first week of November -- wiping away losses and bringing performance for 2020 to 2.3%, the documents show.

Spectrum, an $8 billion fund run by Two Sigma, has gained 5% this year, according to people familiar with the matter.

(Updates with BlueCrest’s performance starting in third from final paragraph.)

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