Swiss private bank Wegelin & Co is planning to expand its footprint into Australasia in 2008. The asset management arm of Wegelin is a leading active quant manager, with $5bn invested in quant strategies ($20bn overall) of which $1bn is invested in single hedge funds.
Head of asset management at Wegelin, Robert Huber, says: "Empirical studies have shown that much of the performance of broadly diversified portfolios is dependent on their allocation of assets between different classes and sub-segments. This can be very profitable, but evidence also shows that the average investor is not able to profit from this approach. Trends are typically not discovered until it is too late."
Wegelin has developed the Active Trend Selection strategy, based on a proprietary quant model that analyses 350 different markets. The strategy invests in the 10 most promising markets and the portfolio is recalculated at regular intervals. The strategy is based on the central belief that collective mistakes by investors distort capital market, resulting in frequent mis-pricing.
Huber stresses that the strategy is relatively conservative and low cost. "We believe that sound economic theory wins; black box models and chasing macro inefficiencies with high leverage is prone to sudden and large draw-downs."
Frank Holle, co-founder of the Singapore based Quantitative Asset Management (QAM), believes a successful manager has to have a firm belief in the factors that went in to creating the model and, following on from that, faith in the ability of the model to adapt to changing conditions. "You need a model that learns, that picks up information and adjusts itself to changing circumstances," he says. "A particular strategy might work for two or three years and then it won't work, so a good model needs to be able to adjust itself. Our philosophy is built around the fundamental belief that you don't tweak the model."
QAM has two funds with $125m under management in the Global Equities Fund and $65m in the Asian Equities Fund. QAM's approach has a high turnover (often 75%) but trades less frequently (once a month). It does not use stop loss limits and does not use much leverage. "Our edge is in having a dynamic model where the factor weightings change constantly."
At the opposite end of the scale in terms of size and pedigree is the US firm Intech, part of the Janus funds stable, with $70bn invested across its range of mathematical strategies. Intech's Global Core Strategy fund reweights the MSCI World Index to what it believes to be a more efficient combination of stocks, Intech attempts to produce a portfolio with higher return but similar or reduced levels of risk.
Bob Garvy, chairman and CEO of Intech, says: "Rather than trying to predict the direction of stock price movements, the strategy is based on finding stocks with high relative volatility and low correlations. They are then rebalanced to target weights over time to create portfolios that produce targeted excess returns with a minimum of benchmark-relative risk." Expected tracking error is 3.0%-3.75%.
Janus Intech has already won business for this in Japan and elsewhere is Asia. The sub-advisory relationship with Nikko Asset Management targets Japanese corporate and government pension funds.