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, investors try to sort through the wreckage to work out what exactly went wrong.

Lars Ericsson, the chairman of soon-to-be defunct Informed Portfolio Management, says it’s clear now that the quantitative strategies his fund used did not deal with the market moves brought on by the pandemic. But he rejects the thought that quants have had their day. “There is certainly a future for quantitative hedge funds,” he said on Thursday.

IPM, a scientific macro fund based in Stockholm, started bleeding client money quite a year ago, with about $4 billion in assets under management flowing out since late 2019.

Ericsson says the fund’s medium-term models did not handle the shock that hit markets in early 2020.

“When the pandemic came, it had been a complete surprise for the models,” he said.

IPM then managed to return 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 partially to a technique counting on value stocks. This year, IPM’s models misjudged the relative gains in interest rates.

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

“We were close to add some short-term factors, which might are 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 within the last six years, with 770 of them shuttering in 2020, consistent with data compiled by Hedge Fund Research Inc.

Last year was particularly tough for computer-driven quant funds, including behemoths like 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 planet . The model was supported historical statistical data, and relied heavily on computers.

Jonas Thulin, who oversees $6 billion as head of asset management at Erik Penser Bank AB in Sweden, says Ericsson is true to defend quant strategies, despite IPM’s demise. However, Thulin, who’s been ready 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 often a strategy he calls “dynamic macro.” the thought is that asset managers “constantly run parallel universes of historical relationships and explanatory variables and structures.” a part of the thought is additionally that the model isn’t wont to predict the longer term , “but rather, the market’s perception of the longer term ,” which needs a person’s 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 worldwide stocks portfolio he oversees is up 39% over the amount .

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

But for IPM, “assets under management decreased faster than we had expected and thereupon asset base it’s difficult to take care of the standard we would like .