In contrast, hedge fund managers attempt to deliver "alpha", the returns over and above the market itself, through a staggering array and diversity of strategies, ranging from betting on global currency movements to surfing on the corporate acquisitions boom. The promise of this alpha is what induces investors to pay extra for the services of the alternative asset management industry.
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But analysts at banks and investment houses have over the years examined the returns of money managers, crunching them with computers and unpicking various "factors" that drive returns. Now some say they have reverse engineered many popular high-octane hedge fund strategies, and can replicate them more cheaply.
"We are now realising that a lot of what we thought was alpha is actually an alternative form of beta," says Yazann Romahi, the head of JPMorgan Asset Management's quantitative investment arm. "This will transform the hedge fund industry."
JPMorgan Asset Management estimates that the "alternative beta" industry's assets have grown from about $2bn in 2010 to roughly $50bn today.
M&A arbitrage is a good example of a highly specialised hedge fund strategy that the "quants" now say they can mimic. "Arbs" place bets on whether corporate acquisitions will fail or succeed. When a company makes an offer for a rival, it will typically offer a premium price — but there is always a danger that the deal collapses, so the shares typically trade slightly below the offer price.
Skilled arb funds — typically stuffed with corporate lawyers, antitrust experts and former investment bankers — buy the shares of targets when they think the deal will go through, and short the ones where they think the deal will fizzle. The risk is in practice binary, and the better the fund, the more accurate its predictions.
Enough deals go through that even average M&A arbitrageurs should make money over time, as they capture what Mr Romahi calls the "deal failure risk premium". But quants now think they can do even better than simply systematically buying acquisition targets, by studying history for what deals go through and which fail, and automatically weighing their bets accordingly.
For instance, Yin Luo, the chief quant at Deutsche Bank, says the single biggest determinant of whether a deal completed is its age. In other words, the longer it drags on the less likely it is to go through. But he has identified a multitude of factors that affect the M&A strategy's success rate, using the same statistical techniques that doctors use to determine how long a cancer patient has to live.