The long term isn’t what it used to be: at least for quantitative investors.
Paul Zummo, JP Morgan Alternative AM Hedge Fund Solutions (JPMAAM) chief, told a NZ audience last week that in the big data era “anything over a month” qualifies as long term for the new breed of quant manager.
Zummo, speaking at the Nikko Asset Management NZ 2018 Investment Summit, said quant investors applying statistical arbitrage strategies need to act fast to capitalise on fleeting market opportunities.
He said ‘statistical arb’ managers in the JPAAM portfolio typically turnover their portfolios “every two weeks”.
“If there’s one cent of trading costs but 10 cents of alpha available then you need to act quickly,” Zummo said.
For several reasons – including cheaper and faster computing power, new artificial intelligence/machine learning techniques and the big data revolution – he said the quant strategies have shifted from old-school statistical regression analysis of limited information sets to “pattern recognition” engines sifting through enormous piles of “unstructured data”.
“[Quant managers] are looking at different types of data than they were 10-20 years ago,” Zummo said. “That might be social media feeds, scraping the web, piecing together inventory trends or looking at satellite images – 90 per cent of the data available today has only been created in the last couple of years.”
And statistical arbitrage was set to be one of the most profitable hedge fund strategies in 2018 if underlying market volatility continues, he told the Nikko audience.
“We think [statistical arbitrage managers] can deliver double-digit returns in high volatility,” Zummo said.
JPAAM has listed two ‘sub-strategy’ variants of statistical arbitrage among its top five strategies for 2018 along with direct private credit, long/short investing and reinsurance.
According to Zummo, the “still dislocated” private credit market provides opportunities both for buyers of traditional distressed loan assets and investors willing to act as niche lenders.
For example, he said JPAAM was interested in the specialist “non prime” US mortgage space as well as large commercial real estate deals.
The reinsurance market, too, offers potentially lucrative returns, Zummo said, given the upward price movements in the sector supported by another recent spate of natural disasters.
Following the massive 2011 earthquakes in Christchurch and Japan, global reinsurers raised premiums, which ultimately led to higher returns investors. On a somewhat smaller scale, hurricane damage in the US last year, for instance, would have a similar effect, he said.
“In June 2011 the mean expected return [from reinsurance] was 16 per cent,” Zummo said. “Now it’s about 8-8.5 per cent.”
Reinsurance was also attractive as a portfolio diversifier, he said, with a very low correlation to traditional assets.
Finally, Zummo said long/short strategies should come into their own in 2018 if volatility remains high – enabling fundamental stock-pickers to take advantage of increased price dispersion while offering some protection from a market sell-off.
The JPAAM hedge fund-of-funds is available to NZ investors via the Nikko Multi-Strategy Fund. According to the Disclose website, the approximately $110 million Nikko fund has returned an annualised 1.86 per cent after tax and fees since inception in 2014. In the three years to this January the Nikko fund returned 3.32 per cent per annum after fees and tax while the underlying JPAAM strategy has a gross annualised 10-year performance of 6.44 per cent.