Posted by on September 8, 2017 12:10 am
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Categories: Business Credit Suisse Economy Finance Financial markets Hedge fund HFT High-frequency trading Lime Brokerage machine learning Mathematical finance money Quantitative analyst Quantitative fund Quants Renaissance Renaissance Technologies Share trading Trading Strategies Virtu Financial Wall Street Journal

Financial markets are increasingly being dominated by quantitative and passive traders (even as quant forms have underperformed this year).

We highlighted this dichotomy earlier this year in a post titled “Quants Dominate The Market; Unexpectedly They Are Also Badly Underperforming It:”

“Two days ago, JPM’s head quant made a striking observation: “Passive and Quantitative investors now account for ~60% of equity assets (vs. less than 30% a decade ago). We estimate that only ~10% of trading volumes originates from fundamental discretionary traders.” In short, markets are now “a quant’s world”, with carbon-based traders looking like a slow anachronism from a bygone era.

Bloomberg confirmed as much today, when looking at another divergence between quant funds and traditional, discretionary managers: “systematic strategies have barely budged from near-record participation in U.S. stocks. Meanwhile, fundamental equity long-short managers can’t afford to be anything but picky, considering the market’s narrow leadership. The result: the largest gap on record between humans’ and computers’ gross exposure to U.S. equities, data compiled by Credit Suisse Group AG show.”

This year is shaping up to be a dismal one for so-called quant funds. Still, even as quants have failed to capture record-setting equity gains, they’ve held on to their status of Wall Street darlings, attracting the lion’s share of inflows, not to mention flattering press coverage, like this profile of one quantitative fund published by Forbes.

Domeyard, a Boston-based hedge fund founded by three twentysomethings, uses strategies pioneered by HFT prop-trading shops, sometimes executing $1 billion in trades in a day.

“We are doing on average $1 billion of daily transactions… it’s a high frequency trading strategy that is signal based.”

As funds scramble to lure new investor with more attractive fee schedules, Domeyard is declining to accept a set fee in lieu of pocketing 40% to 50% of profits. According to Forbes, Domeyard operates more like an HFT shop than a hedge fund in a few notable ways, including its practice of closing out positions at the end of every trading day.

Here’s Forbes:

“Brash and optimistic, Domeyard’s founders have structured their firm as a hedge fund that doesn’t charge its investors a management fee, but does take between 40% to 50% of the profits. Qi says the firm, which currently manages in the low tens of millions of dollars, runs a low capacity strategy that currently makes between 10,000 to 40,000 trades daily. Although run as a hedge fund, Domeyard closes out its trades like many proprietary trading firms do, ending each day with no market exposure.”

The firm has attracted money from big-name investors, including Howard Morgan, a co-founder of Renaissance Technologies:

“Domeyard has raised $10 million for its general partnership from the likes of Howard Morgan, a co-founder of Renaissance Technologies who later became a venture capitalist, and Gary Bergstrom, the founder of quantitative investment firm Acadian Asset Management. Domeyard’s 14 employees include former portfolio managers who led high frequency trading teams at Quantlab, Athena Capital Research and Sun Trading, as well as former senior engineers from PDT Partners and Lime Brokerage—some of the biggest names in quantitative and high frequency trading.”

To be sure, HFT-oriented startup funds like Domeyard are facing obstacles that seem increasingly insurmountable, as the Wall Street Journal pointed out earlier this year. More banks have opened their own HFT arms, arbing away some of the profitability of industry pioneers like Virtu Financial.

For their part, Domeyard’s founders hope to find an “edge” by relying on “sequential machine learning and making large scale computations of statistics.”

“The Domeyard crew is operating in a field dominated by big firms with years of operating history that have spent fortunes on infrastructure and armies of mathematicians and engineers. In addition, this low-volatility stock market era has cut deeply into some of the richest strategies of high frequency traders, causing a wave of consolidation in the industry.

But Domeyard’s young founders think that there are some advantages to being the new kids on the high-frequency block. The firm is working to unlock profitable trading strategies by using sequential machine learning and making large scale computations of statistics. “I feel like we can do better in a lot of areas and with some technological problems because we started from scratch,” says Wang.”

Hopefully the strategy works – for their investors’ sake.

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