At a recent conference I turned to an older colleague and asked, “What did this used to be like?” If you added the context of our setting and conversation, what I really said was, “When this industry was younger, developing, and more dynamic, what did it feel like?”
Hedge funds, broadly, have experienced well publicized margin compression1. This hasn’t negatively affected adoption2, but it has undoubtedly changed the business. While we, as an industry, solve bigger problems today—helping pensions, endowments and other large institutions meet their investment goals—maybe something changed in the process.
Managed futures is our area of focus and has been for awhile. It’s a strategy that was once considered to be a niche subset of a niche business (hedge funds). Before my time—I started in 2010—there were stories of companies founded in garages, doing seemingly crazy things, generating remarkable returns 34. My colleague, responding to my question and recalling those times, stated, “there used to be a buzz.” I remember seeing the tail end of this. After a comparatively remarkable performance in 2008, the industry finally received institutional attention. Managed futures, primarily via trend following, became an accepted institutional tool, benefiting from larger, more structural allocations5. The space grew. And while this growth may not have been distributed uniformly, the fact remains that strategies like trend following have become much more widely disseminated.
But as the space matured, it changed. Today it feels, at least to us, harder to find innovative ideas. New entrants, more often than they used to, rediscover known strategies and struggle to compete with more developed, larger businesses. This isn’t necessarily a fault of their own. Whether you measure in assets under management, operational sophistication or compliance/regulatory proficiency, the gap between the largest and smallest managers feels like it’s widened. It’s hard to compete with an army of PhDs from your garage.
If capability has become more concentrated, innovation probably has too. It’s likely why good ideas are less visible. Large managers are probably more innovative today than ever, but that research—like, say, some novel advancement in the application of machine learning—is used to incrementally improve a core product, often trend following. It isn’t the defining thesis of some new launch, and it’s not directly investable.
When we think about these things we wonder: will we, as an industry, still be incrementally improving trend models in 10 years? Yes, this statement paints with a wide brush, and I don’t mean to sound contentious, but, seriously, will we? In a decade will trend following still be serving as this industry’s brand, or will we see different ideas emerge?
There are inklings that things are changing already. Trend, in its most basic form, has become ubiquitous. Managers are offering product at 50 basis points, or less. Granted, these are typically very large investments, but still, that’s remarkable. At those levels of fees, managers need ever larger asset pools to support their operations. Some have aligned their businesses accordingly, focusing on distribution, reducing costs, and increasing capacity. Other trend managers, who wish to maintain higher fees and protect their margin, have sought differentiation and new value propositions, typically choosing between one of two directions:
- Employing the same models in less liquid, more operationally complex markets
- Trading the same markets but adding diversifying, higher Sharpe, possibly shorter-term models
At this year’s time Summit we’ll seek to more deeply understand the changing landscape in managed futures. To avoid the expected, we’ll draw inspiration from two fascinating businesses (see below) in completely different areas of alternative investments. The idea is that by examining innovation at the extremes, we’ll learn something new about where managed futures is headed, setting the stage for a refreshingly different panel, comprised of Rishi Ganti, Christina Qi, and managed futures practitioners, discussing challenging questions like:
- Are markets more competitive these days?
- Do you believe opportunity sets are cyclical or does competition permanently change efficiency?
- How do you define “alpha?” Is the term misunderstood?
- What does your business look like in 5 years?
- What do hedge funds broadly look like in 5 years? 25 years?
- Is it harder today to attract and retain talented people? What does that mean going forward?
- In tech, larger firms seem to increasingly benefit from economies of scale (think Google, Amazon, Facebook and machine learning, talent acquisition, barriers to entry). Do the same dynamics exist in hedge funds?
We hope you can join us: register here.
Christina QI, Domeyard LP
Starting in 2013 Domeyard did what today sounds impossible: build an investable HFT firm from scratch. The firm believes a meaningful part of its success is due to its highly flat managerial structure and diverse team. The unique culture allows them to attract talent in a highly competitive sector. In addition to establishing an appreciation for the technical challenges of HFT (an HFT can see peak message rates of > 6M per second; Twitter’s record is around 150k), Christina will discuss talent acquisition and culture development as dimensions for competitive advantage.
Rishi Ganti, Orthogon Partners
Rishi holds a unique market philosophy unique (see here and here). He believes that today’s highly computerized, competitive markets make alpha a very rare commodity. Sourcing less understood, non-traded, human capital intensive, and unique opportunities that often have no competing bid is the defining philosophy at Orthogon. We think Rishi will provide an interesting counter-perspective to the mechanically minded crowd at the Summit, helping tie in a discussion of opportunity sets in less liquid assets, which is relevant for CTAs moving into new markets. Rishi will present his journey from academia to Two Sigma to Orthogon and how he developed his unique ideas on alpha, while demonstrating, with examples, the lengths he goes to find new investments.
- http://fortune.com/2016/09/15/hedge-fund-fees-cut/ ↵
- https://www.bloombergquint.com/markets/2017/01/23/hedge-fund-assets-pass-3-trillion-in-2016-for-first-time-chart ↵
- https://www.rcmalternatives.com/2014/02/a-brief-history-of-man-ahl-winton-aspect/ ↵
- http://www.nytimes.com/1998/07/23/technology/talk-type-read-e-mail.html ↵
- http://docs.preqin.com/reports/Preqin-Hedge-Funds-CTAs-March-2016.pdf (see figure 11) ↵