Trends Watch: European Quant Investing

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Andrew Alexander, Raymond Chan & Patrick Cheung, Co-Founders, ActusRayPartners.

What is your outlook for quantitative investing via Europe?

For our process, we believe Europe has the best reward-for-risk with the least downside.  Despite having run quant money previously in China/Asia and the Americas, Europe was our first choice. 

In some ways, Europe is reminiscent of Asia back in the mid-2000s – curiously, there are remarkably few Europe-only quant-orientated funds.  For us, Europe is less crowded.  In addition, European companies are generally more stable which makes them easier to model.  Compared to some other regions, Europe also has lower transaction costs and is potentially less exposed to unusual liquidity flows.  All these items make a quant-orientated process easier to manage in Europe.

However, like elsewhere, pure quant processes in Europe can be challenged by rarely seen situations, if there is a lack of data or where risks develop that the quant process is not designed to handle.  We believe having a discretionary component to the process, which augments the quant investing, can address these traditional quant shortfalls.  

Where do you see the greatest opportunities and why?

We believe the greatest opportunities are in discretionary probabilistic investing.  It is a highly differentiated and lowly correlated to peers process, which has the ability to generate meaningful alpha irrespective of the macro environment.  

We also believe it’s important to diversify across all countries and sectors in Europe across the entire market capitalization spectrum.  This is to ensure that, from a quant perspective, one has a large universe to select a large number of stocks from such that a genuine “probability not perfection” approach can be adopted.  If the investment universe or the number of stocks on the portfolio are too small, then performance may be less stable and lower Sharpe ratios may result.

What are the greatest challenges you face and why?

Raising capital.  Not being able to travel due to COVID-19 has made it difficult to attract institutional interest initially.  Fortunately, we have a collaboration agreement with a Hong Kong institution, Sun Hung Kai & Co, and also already have a European institutional investor.  We are cautiously optimistic now and look forward to soon welcoming a North American investor.  

What keeps you up at night?

As we trade Europe from Hong Kong, the markets keep us up!  At least until the markets close (currently 11:30pm).  The advantage of trading Europe from Hong Kong, like we have done before, is that we can be fully reconciled and have all compliance reporting completed before the European trading day begins.  We also have ample time to discuss stocks and the environment, undertake analysis and determine the shape of the trading we want to conduct.  We believe it is better to be ready for battle before it begins. 

After the markets close, we usually sleep well given our multi-dimensional approach to risk control.  However, we are conscious that paradigm shifts and forced liquidity events, which may have a negative impact, can always develop.  As we have been trading for 35 years and evolving our strategy for over 20 years, we are aware of many of our strengths and weaknesses.   Over the decades, we have had ample opportunities to learn how to manage a wide variety of untoward events and, equally important, develop an approach of how to best consider previously unseen challenges.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.