Earlier this year, Quantedge announced that it will not be providing major investors its weekly estimates. This caused a big uproar because 1) people always complain when they get less data points than they used to; 2) you cannot make intra-month decisions on sizing the fund, should there be big up or down movements.
The first reason can’t be helped. It’s why investors go into managed accounts but don’t do anything with the information.
The second reason you can overcome by tracking the fund’s performance so you know when there is likely a big drawdown. This is different from replicating a hedge fund. I mean if I’m that good then I should be running a quant fund myself. This is monitoring the key factors that affect a strategy so you know when you should be making that phone call to the manager to ask if thing’s are ok.
While I don’t know the secret sauce to the Quantedge machine, I think many people out there understand the principles of risk parity. Since we have no edge on the allocation of instruments, we construct an index (Risk Parity Index, “RPI”) that comprises of an equally-weighted portfolio of equities, bonds, commodities and rates. The index weights target a 30% volatility for the index as a whole, which is the vol target for Quantedge.
Quantedge and RPI have a correlation of 0.82, which is good enough for me to track big down and up months.
Here are the returns of Quantedge vs. our index from Jan 2008:
You can see that the graphs have become more in sync if you look at the returns from 5 years ago:
Let’s look at the months when Quantedge was down big:
In all the months when Quantedge was down significantly, RPI was down too. The average big down month performance was -12.1% vs. our index -13.7%.
Now let’s look at the big up months. For us, big months is less of a concern because we don’t have to worry about hedging or redeeming. But it’s good to check the accuracy of the index.
Again, we see that our index was also up in the months when Quantedge was up big. Quantedge was up 13.4% while our index was up 10.7% which suggests that Quantedge has an allocation advantage over our equally-weighted methodology.
So how do we use our index?
Our index is priced daily so we are able to see if month-to-date if something seems off. For example, in February when we hit -5%, we called Quantedge to have a sense of the magnitude of their loss and whether it is in line with their expectations.
There you go. If you want to be able to track Quantedge (or other single strategy funds), contact us at Quantflix!
Update:
As of June 1, more than 50% of Quantedge investors have moved from the monthly share class to the 3- or 5-year fixed term share classes. Since you can’t downsize your investment in the fund once you are in the fixed term share classes, it is now more important to think of hedging any significant downside risks to the fund. Watch out for our next article on how to hedge your investment in Quantedge!