The Impact of Quantitative Methods on Hedge Fund Performance

Abstract

In the last 20 years, the amount of assets managed by quantitative and qualitative hedge funds have grown dramatically. We examine the difference between quantitative and qualitative hedge funds in a variety of ways, including management differences and performance differences. We find that both quantitative and qualitative hedge funds have positive risk‐adjusted returns. We also find that overall, quantitative hedge funds as a group have higher αs than qualitative hedge funds. The outperformance might be as high as 72 bps per year when considering all risk factors. We also suggest that this additional performance may be due to better timing ability.

Persistent Doubt: An Examination of Hedge Fund Performance

“…Stultz () concludes that, at the very least, hedge funds offer returns commensurate with risk once hedge fund manager compensation is accounted for. More recently, Chincarini () compares the effect of investment styles, finding that funds that follow a quantitative investment style have higher alphas than funds that follow a qualitative investment style.…”

The Market Liquidity Timing Skills of Debt‐oriented Hedge Funds

“…The ability to invest with fewer restrictions than those confronting mutual funds has allowed hedge funds to take positions in sophisticated strategies, leading to more refined market timing. In fact, evidence of the market timing ability of equity-oriented hedge funds is found by Chincarini and Nakao (2011) and Chincarini (2014), while Cao et al, (2013) reveal that equity-oriented hedge fund managers have equity market liquidity timing ability. The 2008 credit crisis sent a clear message on the importance of liquidity conditions in the investment management process, which motivated our paper to focus on the liquidity timing skills of debt-oriented hedge funds, an area not previously subject to academic investigation.…”

“…These findings are consistent with those of Chincarini and Nakao (2011), who find some equity hedge funds have the ability to time the market based on Fama-French size and value factors. Also relevant to the present study are the results of Chincarini (2014), that quantitative hedge funds, including equity-oriented hedge funds, are significantly better market timers than qualitative funds, making them better overall performers.…”

Man versus machine: on artificial intelligence and hedge funds performance

“…Finally, Chincarini (2014) found that discretionary funds are more illiquid and place more restrictions on investor withdrawals than other funds. While these two characteristics are connected (e.g., a stable asset base is essential for investing in illiquid securities), Aragon (2007) documented that these practices are linked to higher average returns for hedge funds (i.e., a premium as compensation for holding illiquid securities).…”

“…We acknowledge that there may typically be a possibility for some backfill bias in the performance figures of the database; however, since no return data is excluded due to our relatively small time series sample such effects can be presumed to be negligible. Further, a potential survivorship bias is accounted for by the inclusion of both active and liquidated funds into the analysis which is detailed byChincarini (2014) andFung and Hsieh (2009).4 Harvey (2021) has recently argued that, if unexperienced researchers use systematic tools, backtests are often overfit, which results in disappointing performance in live trading.…”