Commercial Awareness Update – W/C 30th May 2022

QUANTITATIVE FUNDS

What Are They?

According to the Corporate Finance Institute, a quantitative or quant fund is ‘an investment fund that uses mathematical and statistical techniques together with automated algorithms and advanced quantitative models to make investment decisions and execute trades.’ These funds differ to hedge funds as hedge funds situate their investment strategies in and under human control and management.

There are several types of quant funds, including:

1. Trend Following Funds seek to detect and substantiate trends in the market, further positioning themselves in those markets as the trends move in their favour. Such funds tend to sustain their positions over substantial periods, including weeks and months, and therefore, their win rates tend to be somewhat cumbersome.
2. Countertrend Strategies seek trends on oscillating factors which appear to be reversing from a dominant market position (inflection points), thus seeking to profit by early trade in the reversal pattern. Such instruments tend to have shorter time frames than trend following funds.
3. Statistical Arbitrage Funds seek profitability from a bottleneck in trading prices and usually of two or more securities. There are variables to the arbitrage fund, including convertible and fixed-income arbitrage funds. Further, there are also commodity spread trades.

Some of the most significant quant funds in the world include Renaissance Technologies, which currently manages $116 billion worth of assets with Zoom Video Communications being its largest stock holding, Citadel Advisors, currently managing $234 billion worth of assets with Amazon being its most preferred stock investments, Bridgewater Associates with $235 billion worth of assets under its management with some of its largest stockholdings including Proctor & Gamble and Walmart, AQR Capital Management currently managing $248 billion worth of assets with Apple Inc. as its most extensive stockholding, and Millennium Management presently operating $276 billion worth of assets.

Why Quant Funds?

Investors are increasingly looking for ways to diversify their portfolios, and often, this hunger leads them into relatively uncharted territories, such as that of the quant fund. Due to its primary use of artificial intelligence and mathematical bases, a quant fund is synonymous with greater transparency and scant opportunities for error. Further, hedge funds are credited with the making of faster investment decisions than human investment managers. More rapid investment decisions naturally mean more expedient trading and greater exploitation of narrow price differentials leading to greater returns for the investor.

Additionally, quant funds carry the higher risk factor, and for seasoned investors seeking an economic thrill of sorts, this type of fund satiates that need.

Drawbacks

Quant funds have some notable drawbacks as transparent and as expedient as they are. For one, quant funds can increase market volatility during specific periods of market stress. Also, there is substantial reliance on historical data, and the use of historical information does not guarantee future returns. Additionally, artificial intelligence utilised in the management of these funds cannot detect idiosyncrasies or the peculiarities of trading markets; therefore, it cannot understand the intricacies, especially those intricacies concerning qualitative data and human influences weaving through a market.

Increasing Popularity

As with most markets, the height of the Covid pandemic in 2020 saw a crisis point for most funds. The dramatic shift in trading patterns caused by the pandemic meant that quant funds decreased in popularity due to their positioning characteristics for situated trends. However, perhaps the panic by investors to re-diversify their portfolios to cushion any loss was too hasty as the very characteristics of quant funds meant that they withstood long-term market stress caused by the pandemic, although such stress was prior caused by Brexit and, recently, the Russia – Ukraine war.

Such is the fund’s ability to withstand economic stress that SigTech, a quant trading platform, in its 2021 annual Hedge Fund Research Report, stated that currently, ‘22% of the world’s hedge funds use purely quantitative investment processes’, with the Financial Times recently reporting that the trend following funds industry is now making its most significant financial gains since the 2008 financial crisis.

Irrespective of their clear disadvantages, it would take an unprecedented economic event, one more remarkable than previous and current adverse factors to usurp the increasing popularity of the quant fund as the quant fund enables a more comprehensive portfolio diversification for investors of varying risk levels, it can withstand financial stress far better than its counterparts which means a safer long-term investment option and, perhaps most importantly, the fund is bereft of human input, a factor which has caused mostly avoidable troubling times for investment companies and their clientele alike.

Article written by Aqua Koroma

UK – Mexico Trade Negotiations

On 15 December 2020, the UK agreed to negotiations with Mexico for a bespoke bilateral free trade agreement (FTA), the UK – Mexico Trade Continuity Agreement (TCA), which entered into force on 1 June 2021 and which is of particular benefit to industries the UK already traded in with Mexico to include inter alia, the textiles, automotive, agriculture and food and drink industries with total trade worth £3.8 billion in 2020. The agreement was estimated at the time to be worth £5 billion, and it was hoped the TCA would facilitate free access to either country’s markets by eliminating tariffs, import quotas and export restraints, thus increasing economic growth.

On 20 May 2022, the UK government published a joint statement on the launch of negotiations for an upgraded TCA, ‘Mexico 2.0’ if you will, with Anne-Marie Trevelyan, the Secretary of State for the Department for International Trade of the United Kingdom and Tatiana Clouthier, Secretary of Economy of the United Mexican States, stating ‘we are both committed to achieving an agreement which is better suited for the 21^st century.’

The main objectives of the UK government during these negotiations are to strengthen the trade relationship between the UK and the world’s 16^th largest economy, to use the UK’s newly independent status to fight protectionism and facilitate free trade, to break free into a market with untapped economic and trade resources, to strengthen the UK’s engagement in the Indo-Pacific and Americas regions, to support the UK’s trade across important sectors such as digital and financial services, to maximise opportunities for digital trade, and to champion Small and Medium Enterprises (SMEs).

In addition to the objectives mentioned above, perhaps a more self-serving aim of the UK government concerning the TCA is that there will be an acceleration of the UK’s accession to the Comprehensive and Progressive agreement for Trans-Pacific Partnership (CPTPP), a free-trade agreement between Canada and ten other countries in the Asia-Pacific region. Eventual accession to this FTA translates into the UK joining a conglomerate of dynamic economies already accounting for 13% of the world’s GDP with the added advantage of unfettered access to extensive tariff-free markets.

When negotiating the initial agreement, one of the previous sticking points was the free movement of workers between the two countries and workers’ rights in general. There are ongoing concerns about Mexico’s alleged scrupulous record on workers’ rights. This time around, it is believed Mexico is open to discussing workers’ rights provisions’ inclusion in any subsequent upgraded agreements. However, according to Politico, the UK would have to push for a USMCA-style Rapid Response Labor Mechanism, allowing parties privy to it to call for investigations of violations of workers’ rights (USMCA is the United States – Mexico – Canada Agreement, another FTA).

The suitability of the agreement depends on its adaptability to increasing global trade tensions evidenced over the past few years such as the ongoing socio-political and economic effects of Mexico’s proximity to the US, Brexit, the Covid pandemic and more currently, the Russia-Ukraine war. While it is estimated that Mexico’s import demands are forecasted to grow by 35% between 2019 and 2035 owing to economic expansions as reported by Global Trade Outlook, they are just that; estimations.

Additionally, trade agreements tend to push less successful businesses into insolvency and subsequently bankruptcy, and according to The Balance, ‘bilateral agreements can often trigger competing bilateral agreements among other countries. This can whittle away the advantages that the free trade agreement confers between the original two nations’, therefore there is the risk that the implementation of an upgraded agreement could be counterproductive to its aims.

Conversely however, bilateral agreements are more straightforward to negotiate than multilateral free trade agreements. Therefore, if this resulting upgraded agreement was to encounter obstacles in its impending run, owing to the potentially substantial economic benefits to either party, renegotiations to adapt the agreement to meander those obstacles would be expeditious and no doubt aim to counter any issues.

Article written by Aqua Koroma