As we wrote in this month’s letter to our investment counsel clients, it’s been an unusual year.
Renaissance Technologies and Two Sigma Advisers, two successful quantitative hedge fund managers would agree. Renaissance is one of the most successful hedge funds in the world. Renaissance’s equities fund is down 20% YTD and Two Sigma’s funds are down 11%, 23%, and 2% as of the end of last month.
What’s the takeaway? All investment strategies go through rough periods. If the strategy is fundamentally and logically sound, staying the course is the proper action to take.
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.
Read more here.