Hedge fund successes can sometimes be buried under all the more high-profile companies out there in the market.
They all tread the same pathway towards realizing the maximum amount of profits for clients, but one hedge fund company – Quantedge Capital – is doing it with quiet expertise and great strategy.
They are now showing 40% gains after fees.
The company needs a little introduction first.
Based in Singapore and New York, Quantedge Capital is an alternative investment asset manager.
The fund was reputedly founded and currently run by an ex-professor and a former actuary.
Those career choices set anyone up well for successful hedge fund management.
The one founder, Chua Choong Tze, worked previously as a Professor of Finance in Singapore.
Another founder at the inception of Quantedge Capital is Leow Kah Shin, who worked as an actuary in the islands of Bermuda, according to documents on file.
What an actuary does is deal with management and measurement of the uncertainty and risk as a business professional.
So with these credentials under the belt of Quantedge, it should come as no surprise that the fund is earning some of the globe’s top returns, albeit in a quiet fashion..
The returns may be exemplary, but the methods that are employed by one of the world’s leading profitable hedge funds can also be seen as a strategy only for the high-minded.
The risks are piled fairly high here.
The hedge fund for Quantedge Capital Pte Ltd performed beyond most others in the market with 40% gains after fees for June 2016.
This performance placed it as the second best hedge fund out of more than three hundred and fifty others on the HSBC Holdings PLC list that is compiled and sent to clients every year.
Quantum Capital hedge fund gained around 12% earnings in June 2016 alone, according to the letter as seen by The Wall Street Journal as forwarded to investors.
This was because of two things:
- Bond related investments fronted the June gains
- The increase offsets the losses on the stock market which experienced a free fall after the shock Brexit results when Britain voted to leave the European Union.
Quantedge Capital responded to questions by email when explaining the strategies that have shown to be among the most profitable for the year, 2016.
They stated that by holding slightly riskier longer term bonds, while short-term bonds were betted against, which is a strategy called “Term Premium” – this is good practice during the times the market is in any distress.
As can be seen from the chart below, the website uses it as a good guideline to the performances of hedge funds with a particular focus on Asia-based companies.
It is clearly seen that, even though there is a bouncing profile shown in the chart, there is still a steady rise upwards.
This underlines the fact that Quantedge’s 40% gains and strategy are vindicated.
This is a long-term return that is clearly well above the returns that are shown on average for other hedge funds.
Many investors calculate and evaluate resources over the long term.
Quantedge Capital began trading in 2006 with an initial amount of $3 million.
Currently, they manage $1.3 billion under its flagship Quantedge Global Funds.
This has produced annualized average returns of 27% since the inception of the company.
According to the marketing documents made available to the Wall Street Journal, this is by far more than any other similar hedge fund.
This makes the Quantedge Capital’s hedge fund among the longest running and one of the most successful in the last ten years since it began trading.
Its practices can place it among the risk premium investors on the hedge fund stage right now.
This is an approach that has been the mission statement and viewpoint of an ever increasing number of new hedge fund offerings.
The head of quantitative research, Thierry Roncalli (Lyxor Asset Management unit, Societe Generale) states that this type of investment strategy is appealing to:
- Long-term investors
- Sophisticated investors
- Investors seeking to earn returns in a low-interest rate environment on traditional assets.
This strategy is worth practicing as common assets are showing resistance to upward trajectory as can be seen below on the chart.
And a similar chart profile can be seen below as well.
These are relatively similar trends across the world.
Roncalli goes on to further emphasize, that there is not a magic formula, and some risk must be undertaken.
It would be very unusual to find a portfolio that had both high returns and limited risk.
Unlike bond funds or stocks, that can build a successful portfolio around a particular class of assets, these funds are targeting specific risks around which to establish a collection.
These could be such high-risk investments as harder to trade or illiquid stocks as opposed to easy to buy stocks.
Holding risky long-term debt as opposed to short term.
This is defined as “risk premia” and is a strategy that seeks to profit by the practice of collecting the excess returns.
This is usually expected from slightly risky bets that will compensate the investor for the greater possibility of losses.
Quantedge Capital’s portfolio is sprawling when held in comparison to other similar investors.
The use of automated programs on a computer assists the shift between a combination of more than one hundred positions recorded at any one time.
Everything from bond to commodities markets can be processed in this way, according to the email response from Quantedge Capital.
As an example, for the term premium strategy – the fund can short or bet against three-month Treasury bills and simultaneously go long or bet on gains for ten-year Treasury notes.
This high-risk investment approach is taking as an example, the endowment model of investing practice that was made famous by Yale University.
The book that this takes a page from sought to profit with high stakes over the long run, in riskier investments.
Quantedge Capital raises the stakes in an even more bold strategy than this; that brings it into possibly even dangerous territory – quite a few investors reduce risks by increasing their portfolios as the positions change.
This apparently assists them in avoiding suddenly sharp losses during the times when the market shows fear (as in the Brexit market scare), but this also means that their profits will be slower when the markets show a rebound.
This point can be emphasized when looking at the chart below.
In comparison, Quantedge Capital maintains composed standard risk measure which is known as “annualized volatility.”
This is keeping an abnormally high and constant level of 30% which is around two to three times more than that practiced by other hedge funds.
This results in a higher opportunity for the fund to record above average gains.
Some investors say that this also raises the chance of loss to unacceptable levels.
High volatility funds like Quantedge, could result in an investor pulling out with a loss.
By email, Quantedge Capital replied that their investment goal has always been to compound capital as aggressively as possible, over a long term and at a level of extreme volatility that investors can handle and tolerate.
The risk premia is a strategy that other companies, like AQR Capital Management LLC, are following.
The large returns that Quantedge have experienced have indeed set the fund apart.
The hedge fund industry has had to cope with a less than sterling performance for nearly a decade now.
- Hedge funds across the world produced an average annual return of 3.1%, documented to the end of June this year.
- Quantitative funds for the same period produced average annual returns of 5%
(The data for these statistics was provided by fund tracker HFR Inc).
Even though Quantedge Capital cannot and does not brag about having the Wall Street credentials or background, that are shown typically in many of the hedge funds that are seeking out investors currently.
It is still able to demonstrate that these are not necessary when looking at the stellar performance that the company has led the way with this year.
There have been some hard knocks along the way towards Quantedge’s high-profit returns.
This was very much in evidence when the previous summer’s worldwide market selloff occurred, and Quantedge funds fell 8.9% in June of that year, 2015.
It proceeded to fall a further 16% in August 2015.
This performance on the world market stage was marked out in a letter to investors by the company as “disappointing”.
They summarized the communication with a description of the strategies that have helped form the business into what it is today.
The ups and downs that have been experienced by long-term investors know that this is summed up as “business as usual” – it is a business model that will deliver high returns over a period with some glitches along the way.