10 Biggest Quant Funds in The World, 10 Stock Picks

In this article, we presented the 10 biggest quant funds in the world. Click to skip ahead and see 5 Biggest Quant Funds in The World.

Quant hedge funds saw massive losses in 2020 as machine powered strategies failed to accurately predict the unprecedented market trends. Quant equity hedge funds mainly struggled due to the introduction of new market trends in the pandemic year, which have no previous precedent. This is contrary to quantitative trading strategies that study a large amount of historic data to predict future trends. Quant hedge funds are blaming increased volatility for hefty losses.

Volume, price, and historical data are among the big factors when it comes to quantitative analysis.

“If nothing else, it’s clear that 2020 represents an Achilles’ heel in the hedge fund machines, namely a real failure to grapple with unique new drivers of stock returns that don’t fit the academic models. Even the newer ‘machine learning’ approaches felt somewhat impotent since you need to learn from something, and probably rack up losses while you’re learning,” Keith Haydon, CIO of Man Solutions said.

Meanwhile, the human stock pickers have outperformed machines powered stock-picking strategies in 2020, thanks to their investments in tech and consumer discretionary stocks that are taking advantage of pandemic related policies. In particular, hedge funds with the main focus on tech stocks have topped the NASDAQ index gains in 2020. For instance, D1 Capital Partners has generated more than 50% growth in 2020 amid their bets on tech and internet stocks.

Ray Dalio of Bridgewater Associates

“Stock-pickers had several years of self-inflicted under-performance in the past decade, and the narrative was that computers had defeated humans,” said John Thaler, a longtime equity manager who returned client money in 2015 and this year started a new firm, Hampton Road Capital Management. “Then, the quants hit an air pocket of tough relative performance, and this year, long-short equity managers outperformed by an enormous amount.”

First-quarter was the worst month as quant funds on average fell 3% in February and 4.3% in March, according to the Aurum. Nomura Instinet strategist Joseph Mezrich estimated that only 17% of U.S. large-cap quant mutual funds outperformed their benchmarks after fees in the first quarter of 2020. This means that quants failed to prosper at a time when markets saw an unprecedented drop in stock prices. However, December turned out to be the best month for quants when investors’ focus turned to value stocks from momentum stocks.

Let’s take a look at the 10 largest quant funds to determine the reasons for poor performance.

10. Winton Group

David Harding’s London-based Winton Group’s flagship fund, which is following computer-driven strategies, lost 19% through October in 2020.

The market value of its 13F portfolio stood around $3 billion at the end of the September quarter with $3.5bn assets under management. BRK.A Berkshire Hathaway Inc (NYSE: BRK.A) is its largest stock holding, accounting for 2.16% of the portfolio. The fund likes to make aggressive changes in its stock positions to take advantage of price movements.

Nomadic Value Investment Partners presented an attractive investment case for Berkshire Hathaway in an investor’s letter. Here is what Nomadic Value Investment Partners stated:

“We added to Berkshire Hathaway. I won’t spend too much talking about this, but BRK is as attractively priced as it’s been in some time. The press’s and FinTwit’s fascination with “Warren’s lost it” is at a cyclical peak and is complete noise. However, the valid bear argument is that BRK is too big to compound at good rates going forward, and subsidiary company performance will be weak for the next couple of years with its high exposure to air traffic (Precision Cast Parts and previously held airline stocks) and holdings in “old economy” manufacturing and retail businesses. Also, short-term there’s an unknown consequence of insurance claim payouts and/or refunds 13 . We wouldn’t completely disagree with these judgments, and the optics are certainly bad when BRK doesn’t buy back shares in a quarter with a substantial sell-down. However, with a long-term lens and given the management style of BRK (conservative talk and overperform), we will likely be quite satisfied in the future – whatever that looks like. Meanwhile, we’ve gotten into a range where 30%-50% of BRK is free. Are the actual growth prospects for Berkshire this dire? Berkshire is our largest position.”

9. Two Sigma Advisors

Two Sigma ranks 9th in our list of the biggest quant funds in the world. Secretive billionaire quant hedge fund Two Sigma Advisors was founded in 2001 by John Overdeck and David Siegel. The quantitative trading powerhouse Two Sigma Advisors saw massive profits since its inception, but the quant fund is struggling over the past couple of years. Its absolute-return fund fell 5% through November, while its absolute-return macro fund dropped 23%.

Two sigma is managing $66 billion of assets under management and 13F portfolio values stood around $28 billion at the end of the September quarter. Microsoft (MSFT) and Home Depot (NYSE: HD) are the two largest stock holdings of the Two Sigma 13F portfolio. Shares of HD rallied 22% in the last twelve months. Oppenheimer isn’t very bullish on HD and LOW. Here is what we wrote recently:

Oppenheimer’s senior analyst Brian Nagel said that the stocks are due for a post-pandemic reset after their recent sales surge. His firm lowered its price target for Home Depot and Lowe’s and changed their ratings to perform from outperform. Home Depot’s price target was lowered to $305 from $320 and Lowe’s to $180 from $185.

The stocks have risen sharply since March as people were forced to stay indoors and work from their homes – this created a strong demand for home improvement projects. Now, Oppenheimer believes that the recent surge in sales is due for a correction.

However, Oppenheimer’s long-term view on both Home Depot and Lowe’s is favorable. According to Nagel, their intermediate- to longer-term view on both stocks remains unchanged.

8. D. E. Shaw & Company

D. E. Shaw ranks 8th in our list of the biggest quant funds in the world. Founded in 1988 by computer scientist David Shaw, D.E. Shaw is managing more than $82 billion of assets under management. The hedge fund is among the early adopters of complex mathematical models for trading.

Unlike other quant hedge funds, D.E. Shaw & Co.’s flagship hedge fund generated double-digit gains in 2020. Its composite fund has posted double-digit returns in seven out of the past eight years. D.E. Shaw’s Oculus Fund has also posted a 25% gain in 2020.

The market value of its 13F portfolio stood around $97 billion at the end of the September quarter. Microsoft (NASDAQ: MSFT) is its largest stockholding and the top ten stocks account for 12.3% of the overall portfolio.

Wedgewood Partners, which returned 12.2% for the fourth quarter of 2020, highlighted few stocks including Microsoft in an investor’s letter. Here is what Wedgewood Partners stated:

“Microsoft continued to generate solid double-digit top-line, and operating earnings growth. The Company’s all-encompassing portfolio of “hybrid” cloud solutions is compelling for customers as IT organizations vacillate between on-premises and off-premises (and then likely on-premises again). For example, Microsoft 365 has added an array of features to make remote work easier, yet, as customer applications grow in compute intensity, those customers’ on-premises and edge computing topologies retain or grow in importance. Microsoft’s strategic pivot to be more customer-friendly and collaborative will sustain its growth and returns for several more years so we are happy with our position.”

7. Acadian Asset Management

Acadian ranks 7th in our list of the biggest quant funds in the world. The Boston-based Acadian Asset Management is overseeing $100 billion of assets under management and the firm uses both quantitative and fundamental analysis when picking stocks for the portfolio. The firm is managing $23 billion of securities in the 13F portfolio.

John Chisholm is currently co-chief executive officer (CEO) who developed the first versions of Acadian’s quantitative strategies. Founded in 1986, Acadian Asset Management has offices in several countries including Singapore, Sydney, London, and Tokyo.  Alibaba (NYSE: BABA) is the largest stock holding of its 13F portfolio. Home Depot (NYSE: HD) and Lowes Companies (NYSE: LOW) are the second and third largest stock holdings of the Boston based hedge fund. Here is what Pershing Square said about LOW in its 2020 Q2 letter:

In recent quarters, Lowe’s management has begun to acknowledge its medium-term 12% operating margin target as “not the end point,” but rather “a stop along [Lowe’s] journey,” and has further noted that they believe Lowe’s “can do better than that over time.” As Lowe’s revenue productivity and margins begin to approach its best-in-class peer Home Depot, which achieved a greater than 14% profit margin last year, it will generate significant increases in profit, which, when coupled with the company’s likely soon-to-be-relaunched, large share repurchase program should lead to accelerated future earnings-per share growth.

Despite Lowe’s significant stock price appreciation, it currently trades at approximately 19 times our estimate of Lowe’s next-twelve-month earnings (vs. Home Depot at 25 times), a valuation which does not reflect its potential for significant future profit improvement. As a result, we believe that Lowe’s share price has the potential to appreciate substantially as the company continues to make progress on its business transformation.”

6. Man Group

Man Group ranks 6th in our list of the biggest quant funds in the world. The London-based Man Group funds lost $10 billion in the first quarter of 2020, with most of the losses arrived from computer-driven funds. Quantitative investing saw losses at the start of the year, losses in the market sell-off, losses through the summer, and losses in November, the firm said.

The market value of its 13F portfolio came in at $25 billion at the end of the September quarter while assets under management stood at $113 billion. Microsoft Corporation (NASDAQ: MSFT) and Alibaba Group Holding (NYSE: BABA) are its two top picks.

Alger Spectra Fund has presented a bullish case for Alibaba in an investor’s letter. Here is what Alger Spectra Fund stated:

“Alibaba is the dominant ecommerce platform in the Chinese economy. where e-commerce remains underpenetrated and fast-growing. It is also a leading player in China’s cloud computing, big data analytics. digital media and entertainment markets. The performance of shares of Alibaba reflects investor excitement about its ability to exploit the large addressable market opportunities in e-commerce and cloud computing because of state-enacted barriers blocking foreign competitive entry. Additionally, the accelerating pace of consumer spending in China is one of the world’s greatest growth stories and Alibaba is a prime beneficiary.”

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