CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

37.2 BACKGROUND ON QUANTITATIVE STRATEGIES

This section begins with a brief history of quantitative equity hedge funds. The remainder of the section discusses several aspects that are common to many of these hedge funds.

37.2.1 Short History of Quantitative Equity Hedge Funds

One of the most successful hedge funds of all time is based on a quantitative trading strategy: James Simons's Renaissance Medallion Fund. Very little is understood about its actual methodology, given the secretive nature of the fund; however, the founder's prior successes in the field of mathematics may have led to its tremendous success. The fund has generated an annual Sharpe ratio of over 2.5 for over 20 years on an asset base of over $1 billion, and has had a minimum annual performance over its long history of 21%. The fund is currently closed to new investment.

A distinction between Renaissance Medallion and other HFT funds is that it has done this consistently on a very large asset base. One may often encounter smaller shops with less than $100 million of assets under management (AUM) that can boast a high Sharpe ratio, often over a few years at most. On the other end of the spectrum, one may find a larger hedge fund with extremely high annual returns—for example, more than 30% per year over perhaps three to five years. However, if skill is measured over a long period of time on a large asset base, then Renaissance Medallion is arguably the best hedge fund across all categories, from quantitative to ...