Man Group unfazed by state securities crisis: ‘Machines have usually seen the pattern before’
When the Bank of England stepped in to calm the gilt market in September and save pension funds from crashing, hedge fund Man Group didn’t panic – its quants had seen similar situations before on other markets.
The gilt market is considered a place of stability, where investors go during periods of volatility. Mark Jones, deputy chief executive of Man Group, said Financial News that the crisis seemed unusual because that particular market was swinging, but the pattern was familiar to his calculators.
“Spikes like that — big, dramatic selloffs driven by eventually leveraged holders and no one on the other side — we see these patterns frequently in other markets,” he said. FN.
Man Group, the second largest hedge fund in the world, uses both quantitative and discretionary strategies. Jones said his algorithms knew what to do as gilt yields soared and bid-offer spreads widened.
“These things are very quiet on the quantitative side because this is just another case of market disruption. There is one somewhere in the world on a regular basis; machines have generally seen the pattern before,” a- he declared.
But even if a fund’s algorithms work exactly as they are supposed to, risks remain. During the crisis, liquidity has become a concern and outgoing positions have become a priority.
“You want to start exiting even profitable trades because you’re focused on being able to complete it,” Jones said. “When you hit the ends, risk management actually becomes more important than underlying alpha.”
Dive into data
Man Group leverages data as an important part of its strategy, both quantitative and discretionary. In fixed income, traditional data such as annual reports and price information remain king. But the hedge fund is increasingly using alternative data sets in its investment strategies – using everything from social media posts and internet activity to mobile geolocation to determine outcomes such as sales and pedestrian traffic.
“It opens up the quantitative and the discretionary to perceive different parts of the world and incorporate them into investment processes,” Jones said. FN. “Quants certainly use a lot of alternative data, but it has piqued the interest of discretionary investors considerably.”
Hinesh Kalian, head of data science at Man Group, said FN there has been exponential growth over the past decade for alternative data. According to a presentation at the group’s 2022 AGM, 60% of discretionary teams use alternative data.
Kalian said the company uses satellite imagery to determine metal supply and demand by looking at heat plumes at smelters around the world, for example.
Satellite images are readily available, but turning those images into data that a portfolio manager can use is more difficult.
“In the satellite imagery use case, you would have a platform capable of ingesting and capturing raw imagery data and a data science or machine learning application on top of that,” said Kalyan.
One such process involves locating plants, monitoring them, and looking for thermal activity. These images should also be transformed into quantifiable data.
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Alternative data is not really new, however. Previously, it had a different name: detailed research data.
Jones recalled how a staff member covering European automakers traveled to Belgium every month to retrieve a publication with car volume numbers that could only be found there. Today, with the digitization of data and the increase in the number of third-party sources, it has become much more economical to acquire this information at scale.
“On some level, it’s a continuation of things that people would have liked to do in the past but just weren’t doable,” he said.
But while alternative data has opened up new sources of information, Jones said traditional financial information that traders have relied on for decades remains a priority.
“There is so much value in price information. It is the wisdom of crowds.
Both the quantitative side and the discretionary side have benefited from the investment in data. Jones believes there is a place for discretionary strategies, but they won’t be relevant if they don’t have the same technology and data support as quantitative strategies.
Few of the hedge funds are willing to make this investment, Jones said. Man Group said it spends more than $100 million a year on technology.
“There are a small number of companies that have real expertise in this area. There are clearly competitors that we think are good in this space,” he added. “But the gap between the top and the rest is widening, it’s not shrinking.”
To contact the author of this story with comments or news, email Jeremy Chan
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