A $200 Billion World of Exotic Quant Trades Joins Stock Meltdown

A burgeoning Wall Street strategy that’s been pitched as a shelter from storms is proving anything but in this once-in-a-century market turmoil.

The world’s biggest asset managers and investment banks have packaged exotic hedge-fund strategies -- known as “alternative risk premia” -- and peddled them to pension funds and wealthy individuals. Make them transparent, accessible and, above all, cheap, and investors will flock, the thinking goes.

All told these funds have an estimated $200 billion overall riding everything from short volatility to trend-following.

But in their first major stress test, these strategies are faltering. A Societe Generale SA index of the 10 largest products has dropped a record 8% over the past three weeks. A gauge of similar multi-asset strategies sold by investment banks plummeted 17% in February, the most since 2009, according to Hedge Fund Research.

Sure, nearly all investors are in pain. But for ARP funds supposedly designed to deliver returns decoupled from traditional assets, it’s especially disappointing.

“You’re losing money everywhere, so it’s really hard to hide anywhere,” said Clement Leturgie, who manages Lombard Odier Asset Management’s alternative risk premia fund. “A lot of strategies are actually exposed to tail risk.”

Powered by quant research and derivatives know-how, these funds thrived in a world where investors clamored to protect their portfolios but balked at paying hedge fund fees. In contrast to the traditional 2-and-20 hedge fund model, ARP funds charge a weighted average fee of 0.82%, according to MJ Hudson Allenbridge, an advisory firm. Among the biggest players in the space are AQR Capital Management LLC, BlackRock Inc. and GAM Systematic.

A single fund may chase everything from the value factor to merger arbitrage to intraday trend-following to short-volatility across stocks, commodities, currencies, rates and credit. The diverse approach isn’t a flaw -- it’s a virtue, a way of ekeing out consistent returns from a grab-bag of uncorrelated trades, according to the players.