SINGAPORE (Feb 7): As equity markets have tumbled in response to the spread of the coronavirus from China, fund managers are probably worried about the performance of their respective funds. But not so for Quantedge, a homegrown hedge fund that employs quantitative strategy to seek supernormal returns.
Suhaimi Zainul-Abidin, CEO of Quantedge, says the company’s sole hedge fund, which is available only to accredited investors, is recalibrated on a daily basis. In particular, its quantitative model informs when the portfolio should reduce its exposure to certain securities in response to market volatility and by how much. This is done to keep the portfolio at a certain risk level, he says.
“So there is no emotion to it,” he tells The Edge Singapore in an interview. “We will never have a situation where somebody thinks that we are at the bottom of the market, and therefore wants to double up [exposure to a particular security] … Only when the market volatility comes down, then the model will tell us to scale up our positions again.”
Amid the coronavirus outbreak, Suhaimi says that the portfolio has reacted "systematically" to the heightened risk environment, by "modestly" reducing its equity exposure and commodity positions. He reveals that the hedge fund has returned 1.2% so far this year to Jan 31.
In any case, Quantedge lives by the mantra of setting long-term time horizons to attain supernormal returns – like most hedge fund managers do. And its track record has proven that mantra over the years.
Since its inception in 2006, the fund has recorded a staggering annualised return of 23%, according to Suhaimi. This is significantly higher than the MSCI All Country World Index’s (ACWI) total annualised return of 6.3% over the same period. Quantedge’s return was also significantly higher than the 5.5% average annualised return of its quant hedge fund peers, according to data by Eurekahedge.
The fund’s performance is not the only thing beating the peers – its fees are, too. Quantedge has two share classes by holding duration: three-year shares and five-year shares. The former has a management fee of 1.8%, and the latter 1.5%. Both share classes have a performance fee of 20%. These compare to the average management and performance fees of quant hedge funds of 1.4% and 15.7%, respectively, according to Eurekahedge.
To be sure, part of Quantedge’s outperformance was due to its 70% return last year. While that is certainly impressive, Suhaimi thinks the fund’s performance since inception is a bigger shout-out. “Anybody can have a fantastic year. But to [perform well] over the long term is really challenging,” he reasons.
In contrast, the MSCI ACWI index chalked up a total return of 28.1% in 2019, while Quantedge’s peers registered a lower average return of 7.4%. Over the three- and five-year annualised periods as at end-2019, the global equity index generated total returns of 13.2% and 9.3%, respectively. Quantedge’s peers, on the other hand, recorded average annualised returns of 3.5% and 3.2%, respectively, over the same periods. Suhaimi declines to share the fund’s performance over the three- and five-year annualised periods.
Strategy, courage and patience
Indeed, the last decade has been “tough” for many fund managers, Suhaimi admits. Passive investments, particularly exchange traded funds, have gained strong popularity due to their lower cost of investment. Warren Buffett, no less, has been regularly speaking in support of index funds. “People question whether it is worthwhile to pay fees when [fund] managers are not performing,” he says.
So what has enabled Quantedge to outperform all these years? It is just the quantitative strategy, Suhaimi says, nonchalantly. He explains that the fund seeks to discover any risk premia that can be earned from the financial markets.
Illustrating with an analogy, Suhaimi says everyone who has an insurance policy pays a monthly insurance premium. However, the insurance premium payment is not at fair value as there is a premium to it. Similarly, premia exist in all financial markets. “[Hence], our job is to uncover risk premia in as many markets as possible,” he says.
This is then constructed into a portfolio. “Everything is done systematically. Once we are done with the research, we write the algorithms and put them into the model, which is automated,” he says. “We don’t read newspapers to decide what to trade. Everything [we invest in] is based on the data in the market.”
That aside, a lot of courage and patience is needed, says Suhaimi. This is because a majority of fund managers and investors would probably baulk at Quantedge’s quantitative strategy once the portfolio encounters its first bout of volatility, he says. Quantedge has been “lucky” as its investors understood what the fund was doing, Suhaimi notes. They have accepted the risk from the beginning, knowing that it requires courage and patience to see returns in the long term, he adds.
A case in point was Quantedge’s harrowing experience in its early years. In 2008, the global financial crisis erupted, sending financial markets into a tailspin. Many funds lost 40% to 50% of their asset value and folded, Suhaimi recalls. Quantedge, however, lost 23%.
Fortunately, the fund was able to convince most of its small investor base to stay invested given that the management knew all of them personally. “So it didn’t really affect business and we were able to rebound quickly,” he recalls.
A decade later, Quantedge suffered another bad year. It lost 29% in 2018, as most of the major asset classes plunged. “It was the perfect storm,” says Suhaimi. However, the fund managed to recover to a new high over a span of 12 to 13 months. This was faster than most equity markets, which took multiple years to recover, he says. “One characteristic of the fund is the high level of risk. This means that from time to time, we will lose money. But the great thing is that we have a track record of recovering really quickly,” he says.
So what is the outlook for Quantedge this year? “As a fully quantitative [and] systematic hedge fund manager, we often say we don’t give any view,” Suhaimi quips. “The model is a reactive model. So whatever happens in the markets, the model will react to it. We don’t try to predict what would happen. It’s almost impossible to predict outcomes with any kind of accuracy on a consistent basis. So the best is to react as quickly as we can.”
As of now, the fund is exposed to equities, fixed income and commodities across more than 200 markets. These asset classes are roughly equal to each other in terms of risk allocation. “The model is saying that none of the three asset classes is significantly more attractive than the other at this point in time,” says Suhaimi. Besides these common asset classes, the fund is also invested in lesser known instruments, such as municipal credit, close-ended funds, structured credit and inflation-linked bonds.
‘Believer’ of quantitative strategy
Quantedge was founded by Leow Kah Shin, a former reinsurance pricing actuary, and Chua Choong Tze, a former professor of finance at the Singapore Management University. Suhaimi says neither of them had a career in trading, but they had helped to manage and grow the wealth of family members and friends on the sidelines of their day jobs. This eventually led them to start a hedge fund. “They had a vision or conviction that quantitative strategy is sustainable and can be scaled up,” he says.
Interestingly, Suhaimi himself was an early investor in Quantedge – and he remains an investor today. He claims to be a firm “believer” of the fund’s quantitative strategy, as do many of his colleagues. “Many of us have full conviction in the strategy – we don’t invest in anything else. Most of our net worth is in the fund, instead of putting it in the bank,” he says.
Suhaimi started his career as a corporate lawyer at Allen & Gledhill, acting mainly for banking clients, for 10 years. In 2013, he joined Quantedge as a general counsel, before moving to other departments of Quantedge, such as operations, risk management and investor relations. Suhaimi was appointed CEO in 2018, after Leow and Chua relinquished their roles as co-CEOs to assume their new roles as co-heads of research.
Asked whether Leow and Chua are planning to take a backseat or leave Quantedge, Suhaimi brushes the suggestion off. “The founders are in every day. They are still active. I don’t see any signs of them slowing down. I guess that is good motivation for us,” he says.
In any case, what matters is the fund’s strategy. “We’re not reliant on a single individual to make brilliant calls every day in the market. [Rather,] everybody contributes to a systematic model that hopefully will get better over time,” Suhaimi says. Only time will tell if Quantedge will continue to outperform its peers as it has for the last 13 years.
