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Hedge Fund Collapse in Sweden puts quants back in the spotlight

(Bloomberg) – As one of Sweden’s oldest hedge funds closes its doors, the chief acknowledges that the company’s quantitative strategies have failed to cope with pandemic-induced market disruptions, said Lars Ericsson, the chairman of the soon-defunct Informed Portfolio Management The fund’s medium-term models failed to absorb the shock that hit the markets in early 2020. “When the pandemic came, it was a total surprise to the models,” he said Thursday. But he rejected the idea that quants have had their day. “There is certainly a future for quantitative hedge funds.” IPM, a systematic macro fund based in Stockholm, started bleeding money from clients over a year ago, with about $ 4 billion in assets under management as of late 2019, making it $ 750 million. The main owner, the Swedish investment company Catella AB, tried to find buyers until the last minute, but threw in the towel. The fund managed to bounce back from the brink, but bad trades predating the pandemic came back to haunt the fund. Relative stock models have weighed on performance for years, partly as a result of a strategy based on value stocks. This year, IPM’s models have misjudged relative interest rate hikes. Ericsson says he still thinks everything would have gone well if IPM had lasted a little longer. Just half a year ago, it even hired some people from Goldman Sachs to build its business. But client withdrawals were too intense and the fund had to give up. “We were about to add some short-term factors, which would have been a good spread,” he said. “But unfortunately we don’t get that chance now.” Industry in decline? IPM joins a growing list of hedge funds that have closed in recent years as investors are rethinking their allocations to the sector. According to data from Hedge Fund Research Inc. more hedge funds have closed than started in the past six years, 770 of which closed in 2020. Last year was particularly difficult for computer-aided quant funds, including giants such as Renaissance Technologies, Winton’s Systematic Macro Strategy and Two Sigma. IPM applied fundamental macroeconomic principles to rank asset classes and economies. Then it distributed the money among the asset classes, including government debt, stock indices, commodities and currencies around the world. The model was based on historical statistics and relied heavily on computers. Year-to-date, the systematic macro fund generated a negative return of 7.7%, according to data collected by Bloomberg. For the whole of 2020, the return was minus 3.8%. Jonas Thulin, who oversees $ 6 billion as head of asset management at Erik Penser Bank AB in Sweden, says Ericsson is right to defend quantitative strategies despite IPM’s demise. However, Thulin, who has roughly quadrupled assets under management using macro strategies since 2018, says quantitative models become dangerous when applied too narrowly. The Killers “The usual killers of quantitative strategies are so-called paradigm shifts and shocks,” he says. Thulin says the way around this is a methodology he calls “dynamic macro.” The idea is that asset managers “constantly manage parallel universes of historical relationships and explanatory variables and structures”. Part of the idea is also that the model is not used to predict the future, “but rather the market’s perception of the future,” which requires a human mental health check. That approach helped Thulin achieve a return of 26% over the past year. on his company’s multi-asset portfolio, compared to the 5-7% annual return it targets. The global equity portfolio he oversees is up 39% over this period. Ericsson notes that the long-term trend suggests that the share of total assets managed according to quantitative strategies is increasing, “even though there is now a temporary setback.” for IPM: “Assets under management fell faster than we expected and with that asset base it is difficult to maintain the quality we want.” history in 11th) For more articles like this, visit bloomberg.com Subscribe now to stay up to date with the most trusted business news source. © 2021 Bloomberg LP

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