We have heard WQ spinning off from Millennium, either in the form of a carve-out or larger capacity / lower return version, on-and-off these few years. This week we read that WQ will launch a 170/70 fund trading equities. The fund is expected to raise USD10bn, given that WQ is a rather big part of Millennium. This time it seems quite real because I keep seeing Igor’s name on the cap intro conference circuit.
Should investors expect the new WQ fund to perform like Millennium?
It’s easy to see the appeal of the new fund because institutional investors have too much cash lying around and they want to invest in a fund where they can rest easy for the next 10 years knowing it will make money steadily, and make enough to cover their pension liabilities. But from what we know, WQ is likely to be market-neutral with high Sharpe strategies. By aiming for high Sharpe, there is a limit to how much money you can run. A 170/70 fund means you have a 100% net exposure to the market. Totally different from a market neutral strategy.
Having a different strategy from the main WQ fund does not mean that investors should not invest. There was the same confusion when RenTech first came out with RIEF. Investors thought they were investing in a slice of Medallion which has been known to produce 40% annualized returns AFTER fees of 5 and 40 or something crazy that puts the typical 2 and 20 to shame. RIEF had a rocky start but as they started pumping out solid returns AUM ballooned to 20 billion. This is way more money compared to Medallion’s capacity of less than 10 billion.
Of course being 100% net long you are naturally rather correlated to the market. And the market has done pretty well till end of last year, with S&P’s Sharpe beating most hedge funds out there. As you can see from RIEF’s performance, it’s not much of a hedge fund because when markets tanked during the Great Financial Crisis, it also went down.
GREAT AS LONG-ONLY SUBSTITUTE So if you are looking for a substitute for your long-only book, the new WQ fund might be interesting. This is also a bet that the market will continue its bull run. Just don’t be mistaken about it being uncorrelated to the market.