Quant on Quant: Picking Winners in the Era of Machine Investing

(Bloomberg) -- The burgeoning field of computer-driven investing has grown so large and complex that a Singapore family office has decided you need a quant to find the right quants.

Multi-family office Gao Capital plans to open Asia's first independent research service for investors that's focused exclusively on funds employing quantitative models. Gao Capital's research has involved scrutinizing the funds' correlations to market moves and to one another, as well as risk and volatility measures.

“We want to be the stamp of approval for quant funds,” said Chauwei Yak, who co-founded Gao Capital in 2008 in New York before moving to Singapore two years later. “Our aim is to help people find the right quant fund for their portfolio.”

Strategies employing quantitative models, devoid of emotion and human foibles, have surged in popularity worldwide as investment firms seek a technological edge to revive flagging returns and attract investors. Quantitative strategies have beaten their human counterparts three of the past four years and many racked up gains last year after accurately predicting outcomes to political events such as the Brexit vote and the U.S. presidential election.

Investors put $4.6 billion into quantitative strategies worldwide during the first quarter while pulling $5.5 billion from hedge funds overall, according to data provider Hedge Fund Research Inc. More than 50 percent of investors planning to add at least one computer-driven strategy to their portfolio, according to a Deutsche Bank AG global survey published in March.

Spurious Claims

As more funds proliferate to take advantage of investor demand for such strategies, one challenge is to identify managers that truly use computer-driven models. In sifting through hundreds of funds, Yak has found that not all quant funds are what they claim to be.

“We found managers who say they run a quant fund, but do all the strategy on Excel,” said Yak, a former investment banker at JPMorgan Chase & Co. and UBS Group AG. Another claiming to be a high-frequency fund did all its trading in the morning. “That's not high-frequency trading. Their system didn't match their strategy.”

Gao Capital has about $600 million invested in quant funds, with the money coming from the relatives of the firm's four partners and other wealthy families and institutional investors. The research platform will mark an expansion into advising other clients on picking funds and analyzing how they fit into investors' overall strategy. Gao Capital targets annual returns of between 15 and 20 percent on its quantitative portfolio and has met that goal in most of the past years without a single down year, Yak said.

One of the funds Gao Capital is looking at is New-York based Trinnacle Capital Management, which analyzes big data and was founded by Eric Kohlmann Kupper and Joel Nathaniel Bloch. The class-A-shares of their Trinnacle Master Fund have returned 10.6 percent since inception in November until the end of April. The fund has less than $5 million in assets, but Gao Capital is assessing whether the strategy works, Yak said.

Mapping Data

“The fund utilizes satellite mapping data,” Yak said. “Think about something like being able to track how many people visit a store. Then we have to analyze if this can translate into useful data to predict share price.”

Gao Capital can point to its own expertise in the area, with team members that have mathematics and computer science degrees and even a former stint as a math Olympiad participant.

Yak developed her interest in quant strategies while developing a hedge fund portfolio at the $1 billion family office of Greek Crown Prince Pavlos, where she worked after graduating from the University of Pennsylvania with degrees in mathematics, economics and Asian and Middle Eastern Studies. She co-founded Gao Capital with Adam Lee, a Taiwanese-American who holds a Master's degree in computer science from Stanford University.

They were later joined by Ted Low, who was a member of the International Mathematics Olympiad training team in Singapore, joined university at age 16 and graduated from the Massachusetts Institute of Technology. The latest partner at the firm is Mike Borsetti, a Harvard Business School graduate and former consultant at venture-capital firm Accel Partners.

“Ten years ago, quant strategies were a niche thing,” Yak says. “Going forward, it will affect every part of investing.”

To contact the reporter on this story: Klaus Wille in Singapore at kwille@bloomberg.net.

To contact the editors responsible for this story: Sree Vidya Bhaktavatsalam at sbhaktavatsa@bloomberg.net, Peter Vercoe