Many hedge funds deploy the use of computer-driven models to help foster, develop, and ultimately support trading strategies, however the disparity lies in the actual execution of said models, which seem to be outperforming markets at a staggering pace.
Principal Global Investors’ (PGI) Macro Currency Group is one such fund that relies on these models, which delves into a deep analysis of the current market conditions, finally settling on long-term economic projections for the next calendar year – the main caveat is this process often yields a singular decision, according to a recent Bloomberg report.
Looking at the PGI modeling, the projections showed that the JPY would appreciate against the CHF, which ran counter to many forecasters’ thinking. This skepticism was echoed by other models from leading currency analysts that saw anything but marginal changes in 2016.
Fast-forward to now and the JPY has appreciated 14% against its Swiss counterpart, instigated in part by safe haven accumulation and circumstances surrounding the Bank of Japan. Needless to say, the quantitative model has been outperforming other funds year to date.
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According to Ivan Petej, a senior money manager and Head of Quantitative Strategy at PGI in London, in a prior statement about the modeled performance: “Being very long yen at the beginning of the year wasn’t a very popular call. What I was more worried about was when it was going to happen.”
To understand how the model works is to disaggregate the factors that go into pushing an overall strategy. At the forefront is a once-a-year call, which hinges upon a wealth of data and economic gauges that robots track. This includes data that is accessible enough to lay traders such as manufacturing data and other leading indicators.
Another boon for the fund is that computers are supplemented by human intervention, such as money managers who control for risk fluctuations.
“If you trade this basket every year, you will get a proxy for global growth. It trades once a year because the time horizon for different drivers — valuation drivers, growth drivers, benchmark drivers — is a yearly time horizon. Everything that happens intra-year, one week, six months, is dealt with a discretionary component,” explained Mr. Petej.
Regardless of the level of success, the practice is quite novel. Indeed: “Systematic funds are running these computers constantly and are often making a lot of trades throughout the day. It’s very unusual to put a trade on and not take it off for an entire year,” noted Don Steinbrugge, Managing Partner of Agecroft Partners in an accompanying statement.