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Quantitative Versus Qualitative Hedge Funds

| | Posted in: Mutual/Hedge Funds

Do quants outperform quals? In his January 2010 preliminary draft paper entitled “A Comparison of Quantitative and Qualitative Hedge Funds”, Ludwig Chincarini compares the performance characteristics of quantitative and qualitative hedge funds. Using return data and strategy descriptions spanning a total of 6,352 hedge funds over the period January 1970 through June 2009 and risk factor adjustment data for a January 1994 through March 2009 subperiod, he concludes that:

  • The average qualitative (quantitative) hedge fund has grown assets by 17% (11%) per month.
  • Management fees tend to be a little higher for quantitative funds, while incentive fees tend to be a little higher for qualitative funds.
  • On the whole, qualitative funds are less liquid, while quantitative funds are less transparent.
  • Based on raw returns over the entire sample period, quantitative funds have a higher average return and a lower average standard deviation of returns than do qualitative funds. Among the quantitative funds, the Quantitative Directional strategy (varying levels of net long or short equity market exposure) has the highest average return. During the 1990s (2000s), the average quantitative fund return is lower than (about the same as) the average qualitative fund return. During January 2007 through March 2009), quantitative funds outperformed qualitative funds (3.29% versus -4.77%).
  • Both quantitative and qualitative funds in aggregate have positive risk-adjusted returns. The aggregate risk-adjusted performance of quantitative funds is as much as 0.72% per year higher than that of qualitative hedge funds.
  • Driven by the presence of Equity Market Neutral funds, quantitative funds in aggregate underperform qualitative funds in up markets (15% versus 25%) but outperform in down markets (-2% versus -16%).
  • The overall outperformance of quantitative funds may derive from better market timing.

In summary, evidence indicates that hedge funds employing quantitative analysis strategies tend to outperform those that use qualitative strategies, perhaps based on superior market timing.

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