Battle of the Risk Premia Bots

“I want to put money in Bridgewater”.

This came from my friend, D, who practiced as a lawyer in a New York white-shoe elite law firm and now runs a successful education business, and always making fun of finance people for having sad, pathetic lives. I was intrigued that he has finally come to the dark side.

“I read his book and thought he made a lot of sense”. Generally I would say being in the news is not a good thing for successful hedge fund managers. I mean if he’s on a book tour he has to spend less time on the fund. Look at what happened to Bill Ackman after his fund topped the hedge fund list. But I digress. I must admit that I have not read the book but I told D that I agree with Bridgewater’s strategy of risk parity and diversification. And the positive news for D is that he is already invested in Quantedge which also has a risk premia strategy and has annualized at about 30% for the last ten years.

“I still think Bridgewater is better”.

Okay… I have nothing against Bridgewater or Ray Dalio, and I might be biased towards Quantedge because one of the founders was my classmate, and I was an early investor in the fund. First let’s see if these two funds should even be compared, like apples vs. oranges. Or Godzilla vs. Ultraman. No wait, then that means they are comparable.

Returns Correlation

Unfortunately in hedge fund land, we don’t have a Netflix to tell us which funds are similar to the fund I have selected. That’s my next big secret project but because it’s not a Uber-of-something I’m not going to receive enough funding to provide unlimited free beer to attract super genius coders. So we do this the good old-fashioned way using Excel which is the only programming language I know, and yes, I have been told politely many times that Excel is not commonly regarded as a programming language.

Luckily I made enough money to hire people who live and breathe Python, Julia, other names that sound like either a dangerous animal or a member of the female species which can also be a dangerous animal.

(All below analysis based on data from Edgefolio)

Here are the correlation results between Bridgewater and Quantedge:

That looks pretty correlated to me. McDonald’s vs. Dunkin Donuts coffee.

Performance

What you should NOT do is to see which fund has the higher return, even annualized. A lot of databases out there have dropdown buttons to see Top 10 funds ranked by YTD, 1Y, 3Y, 5Y returns, and while it’s fun to see that the top fund in 2017 in Edgefolio is a fund called Cryptos Fund making just 1900%, I don’t think investors are going to rush to invest in Cryptos Fund because you might lose 100% the next year.

So how do we compare Bridgewater’s returns annualizing at 5.84% vs. Quantedge’s 25.31%? We normalize the returns to match the volatility.

Since Bridgewater All Water has a target volatility of 12% and Quantedge 30%, we can simplify the process by comparing Bridgewater with 1/3 Quantedge, so you get roughly the same volatility, assuming actual volatility does not deviate much from target volatility. This is what you get:

We see that 1/3 Quantedge beats Bridgewater by 67.89% even with a lower volatility and lower max drawdown:

Of course, this could be because of the starting point which we have taken to be Quantedge’s inception. But what happens if we pick another random date, January 2010:

Here we see that both funds end up with about the same returns, but still with Quantedge edging out Bridgewater in the other measures:

Conclusion

There are many differences between Bridgewater and Quantedge, with the most obvious being that Bridgewater is ~160 billion in AUM vs. Quantedge’s tiny-by-comparison 1.7 billion (which is its peak AUM already). Some institutional investors can only be a certain percentage of a fund, and their minimum ticket could be 100-250 million which means they have to invest in much bigger funds.

Another difference is the business approach of the two funds. This is what Hedge Fund Insight has to say about Quantedge’s marketing policy (or lack of):

No Marketing

If you look the firm/fund up on a hedge fund database you will not see a marketing contact listed. This is what the firm says about marketing:

§ Our principals do not travel to Europe for marketing purposes.

§ We do not carry out active marketing nor do we engage third party marketers.

§ The investor services desk at Quantedge facilitates investors’ due diligence and transactions. We do not conduct ‘marketing’ in the conventional sales sense (nobody in the firm does that, although, we happy to speak with investors and potential investors).

§ Sometimes, the trade press inform us of their intention to write an article about Quantedge. We would send over the relevant info via email so as not be to misquoted. We do not usually solicit media coverage.

§ As of now, there is no intention to carry out any marketing campaign, hence, we have no interest to engage any 3PM.

§ We can provide potential investors with the additional information that they may need as well as arranging for a meeting or a call with one of the directors. Choong Tze and Kah Shin may sometimes get involved in speaking with investors, especially the larger ones, but they generally prefer to focus on managing the portfolio.

http://www.hedgefundinsight.org/does-the-absence-of-marketing-at-quantedge-capital-matter/

And here is what HFI had to say about Bridgewater’s marketing efforts:

The extreme opposite of Quantedge Capital is possibly Bridgewater Associates. The firm which runs the world’s largest hedge fund has a Marketing department, a Client Services department and a Counterparty & Client Relations department. More than 10% of the 1,200 staff at Bridgewater Associates work in Client Services.

So if you need lots of nice white papers and hand-holding to help check the boxes, then you can’t just look at performance numbers.

But if you are just looking at making money in the best risk-adjusted way, and you don’t have a board of trustees screaming at you, and you don’t have to produce a long presentation to cover your ass, then maybe it’s possible to look at Quantedge as a smaller and nimbler alternative to a risk premia fund.

And to D, you should definitely stick to law or your education business 😊