Who’s got the edge in the Quantitative Trading Space?

Learning from the competition while looking for a niche in the market where your idea, trading strategy or business can fit in is paramount to the success of your venture. A thorough research on your competition, strategies, trading operations would present you with the ideas and direction that you need to take in order to gain market share and identify opportunities in the market. Successfully developing your strategy and product within any industry is highly dependable on what is actually currently going on in the space. Knowing your competition is not only about knowing your competitor’s weaknesses but also knowing what customers are looking for and what really works in the market at this moment. That being a particular market to trade, trending strategies that can be applied at the particular time period or simply where areas have not been explored yet due to an array of different reasons that may be. Finding your USP (unique selling proposition) that being a specific market, strategy or idea to trade would be your main driver for success – why was the fund started, why is the team better and what are the competitive advantages that it has compared to the rest of the market. Finding a way to stand out or offer something different to your investors/customers is what is going to give you an edge in the market in addition to your successfully performing trading strategies. In this article, we are going to look at some of the most successful funds in the world and what sets them apart from one another in terms of their research process, execution capabilities, markets & strategies traded.

Starting with research there are similarities noticeable among all the firms where they all follow a rigorous, scientific approach to designing and creating strategies to trade the financial markets. Avoidance of strategy flaws like overfitting, data-mining and hindsight bias is super important. On the other side execution through a large array of international markets across different instruments demonstrates the capabilities and diversification of the funds while the investment structure employed varies depending on the jurisdiction that the business is registered under. Risk management is one of the most important factors that is often overlooked by investors and the public. Although this is the most important aspect of running quantitative strategies with client’s money where small mistakes or unexpected moves in the market can trigger a failure on a scale. The key to successful trading strategies is not the profit generation aspects, but the capital preservation in the long run based on sound and solid risk management practices.

The big quantitative hedge funds are located and have offices internationally and around the world’s biggest financial centres – New York, London, Hong Kong, Singapore. Let’s briefly look at some main points for the ones we are looking at for this article:

  • Renaissance Technologies (East Setauket, NY) works in a very structured way where each team member would be doing a set amounts of tasks and plugging this into the automated system. James Simon’s famous and one of the best performing funds in the world with only 290 employees is driven by the scientific method for strategies generation and excellency for implementation and execution. Mainly driven by scientists the fund’s edge lies within excellence in mathematics and the scientific method employed for trading. AUM: $84 billion USD (2018) Offices in New York & East Setauket.
  • D. E. Shaw (New York, NY) – D. E. Shaw group analyses an enormous amount of market data through thousands of different markets looking at various parameters associated with each security. Pulling data from international sources and encompassing tens of thousands of financial instruments across geographies and asset classes paired with optimized expected returns and control of aggregate risk the company manages more than $26 billion AUM. Academic culture solving real-world challenges and the excitement of a start-up provides the edge for D. E. Shaw.
  • Two Sigma Investments (New York, NY) – the fourth largest hedge fund by AUM $51 billion shows similarity to the previous two. Its disciplined, process-driven investment process employing artificial intelligence and machine learning brings returns to the stakeholders of the company. Vast computational power and advanced modelling are at the heart of Two Sigma which puts technology as a profit centre rather than cost. The company is run like a software enterprise rather than a financial enterprise generating 35+ petabytes of data coming from 10,000 + data sources to fuel their strategies. $58 billion AUM.
  • AQR Capital Management (Greenwich, CT) believes that a systematic and disciplined approach and processes spread throughout a large range of markets and securities can bring value to its investors. Common sense combined with statistical firepower across trading strategies over many markets drives AQR to end of each succeeding year.
  • Citadel (Chicago, IL) led by Ken Griffin this firm is on a mission to investment success with $30 billion AUM and international offices. Discipline, focus, diverse strategies and consistent investment returns put the firm at the forefront of trading and investing. Hiring extraordinary people is at the heart and a most important factor behind the company where the people that run it provide its edge.
  • PDT Partners (New York, NY) one of the premier quantitative trading groups founded by Peter Muller in 1993 combines creativity, mathematical knowledge, technical sophistication and teamwork. Long track record and solid experience behind its team help the firm manage $4 billion AUM.
  • Cubist Systematic Strategies (*Point 72, New York, NY) culture of excellence and passion for investing leads the way in Point 72 by the famous Steven Cohen. Strong software development and academic background are inherent to the team at the company which is its biggest asset. The company deems itself a 25-year-old startup with $13 billion AUM.
  • Millennium Management (New York, NY) global multi-strategy investment approach differentiating itself from the ability to deliver consistently good performance and returns to its investors. Millennium has $35.9 billion AUM.
  • World Quant (Old Greenwich, CT) this firm seeks to constantly produce high-quality alphas through a proprietary research platform with international coverage on markets around the world. The interesting edge that World Quant has is the diversely dispersed research and scientific team that constantly works on creating new strategies and trading signals. A non-profit education initiative has also been started by the company to promote data science and quantitative education $5 billion AUM. WQU
  • Man Group AHL (London, UK) is a pioneer in systemic trading for over 30 years which only uses algorithmic trading and strategies trading mostly derivative products like futures over many international markets. The fund is institutionally orientated with University of Oxford collaboration. With a scientifically based approach and an army of academics the firm manages over $25 billion AUM and trades more than 600+ markets.
  • Winton Group (London, UK) scientific research and mathematical analysis also mark the main trading strategy generation methodology that drives one of the biggest European Hedge Fund with $28.5 billion AUM.
  • Hudson River Trading (New York, NY) brings a scientific approach to trading financial products where a sophisticated computing environment is at the foundation of its business. Researchers and Engineers at the helm of the company convert it into a Tech-first venture very much like Two Sigma.
  • Jane Street Capital (New York, NY) has a main focus on ETF trading and using Ocamel language as the main driver of its quantitative strategies. Market-making within this niche market in addition to its IT infrastructure makes for a unique business model, trading executions and strategies that bring in $13 billion AUM.
  • Jump Trading (Chicago, IL) Jump Trading combines sophisticated quantitative research, best-in-class technology, and an entrepreneurial culture to create a leading global, quantitative-based trading firm. The culture of intellectual curiosity and learning paired with superior infrastructure gives it an edge among its competitors.
  • Bridgewater Associates (Greenwich, CT) lead by the legendary hedge fund manager Ray Dalio, which has a unique approach to teamwork and company culture dealing with a meritocratic workplace where meaningful work and relationship are pursued through radical truth and transparency. Long track record of over 40 years with institutional clients such as pension funds, endowments and sovereign wealth funds puts the firm at the highest $160 billion AUM.
  • Virtu Financial (KCG, New York, NY) is a quantitative fund who is specifically focused on market making for the industry as a whole. This niche strategy combined with cutting-edge technology, speed, exchanges agreements for access and transparency with its clients gives it an edge against the competition. Virtu has developed a matching engine that gives it a real advantage in the market.
  • Tower Research Capital (New York, NY) lead by Mark Gorton with 30 separate trading teams the firm employs a diverse set of trading strategies across a broad range of asset classes on international markets. Entrepreneurial focus and technological advancement are at the heart of Tower Research which considers itself a Technology Company rather than a trading one.
  • Alpha Simplex Group (Cambridge, MA) also has a research-driven approach to investing with a rigorous risk management framework. The company focuses only on Futures and Forward derivative contracts representing their niche market and an edge. AUM $7.6 billion
  • Capula (London, UK) is a global fixed income specialist firm that manages absolute return strategies and tail risk hedge products. The particular asset class focus, as well as primarily alpha generation driven team who stays neutral to directional moves, represent the edge of Capula in the market.
  • Panagora (Boston, MA) consistent returns paired with transparency and technological edge where both bottom-up and top-down approach is used on macros strategies. Through innovative research and sophisticated quantitative techniques incorporating fundamental insights, team praised on excellence brings value to Panagora’s investors. AUM $22.3 billion.

After this quick overview of the competitive landscape, we can observe some key themes of technological innovation, academic research rigour and curious, entrepreneurial teams that strike to be one of the major driving points within those firms. Many of these above invest largely on behalf of institutions, deploying conservative strategies over long-term time horizons with sophisticated risk management.

Knowing your competition is not only about knowing your “enemies” but also knowing what customers/investors are looking for and what really works in the market at this moment. Key leaders with a great team behind them standing on the edge of technological innovation is a common theme for these companies. Looking at trading and the creation of strategies as solving complex mathematical problems through the scientific method and high-end technology is how those funds have been able to stay at the forefront for decades. Having a great competitive advantage, an edge, in comparison to the other market participants is crucial for the success of your trading strategies and business. The edge can be in many different forms or a combination of information, marketing, trading and resource advantages. For example, marketing advantage can be your connections to a large pool of investors and/or institutions while the trading advantage may present itself in the exploitation of market inefficiencies that were missed by others. Finding your edge is a never-ending feedback-loop that is subject to constant changes and failures in an environment that is very far from fixed with 100s of variables affecting it. Staying on top of tech being willing to change while collaborating and valuing your team can greatly improve your chances for success and finding your edge in the markets.

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