The Washington Post had an interesting piece today on a type of hedge funds known as quant funds that seem to be popular with the county of San Diego’s pension system.
The Post talked about the hedge fund AQR, whose representatives spoke before the county recently after the fund lost a significant portion of its value last month.
Here’s the Post’s take on quant funds:
Instead of veteran, market-savvy traders waving fistfuls of sell slips, the elite quant funds employ Nobel nerds with math PhDs, often divorced from the real world. It’s not for nothing that they are called “black-box” funds — opaque to outsiders, the boxes contain investment magic understood by only the wizards who conjured it up.
But the 387-point drop in the Dow Jones industrial average Aug. 9 and the continuing turmoil in the markets, in part attributed to massive sell-offs by the quant funds, have tarnished some of the quants’ glimmering intellectual credentials and shown that, when push comes to shove, they can rush toward the exits as fast as a novice investor.
And the Post quotes a letter to clients like the county pension fund from AQR’s founder, who by all accounts seems to be a pretty bright guy:
“I occasionally hear broad statements like, ‘This just shows computer models don’t always work,’ ” Clifford S. Asness, founding principal of the quant-fund firm AQR Capital Management, wrote to his clients after the sell-off. “That’s true, of course, they don’t, nothing always works. However, this isn’t about models, this is about a strategy getting too crowded, as other successful strategies both quantitative and non-quantitative have gotten many times in the past, and then suffering when too many try to get out the same door.”
The county has more than $50 million invested with AQR. By the way, I’d like to reiterate that it was impressive that AQR’s representatives turned up at the county’s last meeting to answer questions after such a tough month.
Another quant hedge fund, Campbell & Co., received a $60 million investment from the county’s pension system. Campbell lost 13 percent of its value in the month of July alone.
The county pension system’s staff recommended the trustees stick with Campbell.
The consensus from the advisors, consistent with Staff’s view, is that while although [sic] this is clearly a difficult period for Campbell, it is not completely unexpected given the recent market turmoil and is inline with historical risk/return patterns.
The staff reported that Campbell decided to waive its management fee for the year to make up for the pain.