SAC Launching New Quant Fund

May 23, 2011

The empire founded by Steven Cohen, SAC Capital Management LLC, is reportedly launching a new hedge fund specializing in quantitative trading. It’s the first new fund for the firm in six years. SAC apparently already has “20 teams” of quant traders ready to manage the new fund.

Quant traders buy and sell stocks based on complex and proprietary computer models. In a pure quant fund, decisions to buy or sell securities are made by the machine. However, there is often a middle ground where fund managers have some discretion on investment decisions, in addition to the quantitative model. Currently, quant trading reportedly makes up about 15 percent of the $35 billion in assets that SAC manages.

“Some investors want quantitative funds because they are very liquid and a good diversification from fundamental long- short equity,” said Larry Chiarello, a partner at SkyView Investment Advisors LLC in Shrewsbury, New Jersey, quoted in a Bloomberg article.

Computer models for quant funds can vary a great deal from one fund to another. Some focus on value measures such as a stock’s price-to-book-value ratio or price-to-sales ratio. Others may focus on momentum factors, such as a stock’s performance over the previous 12 months.

Although as recently as September of last year, many quant funds have been hit by a string of poor results and a wave of redemptions, according to the Wall Street Journal. They reported a survey of 65 such funds tracked by investment-research firm Morningstar Inc. that showed quant funds lagged behind 72% of their category rivals, on average, in the three years ending Aug. 27, 2010.

As a result, quant funds began striving to bring more of a human touch to their investment decisions. Fund managers are trying to make their models behave a bit more like people, by making them more responsive to changing circumstances. This can mean revising computer models more often, or incorporating measures of macroeconomic risk rather than just stock-specific information.

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