Man AHL Quants’ Challenge

It has been 25 years since Man Group’s futures trading program, AHL, started operating. One of the largest managed futures funds with $21 billion in assets as of the end of 2011, AHL has a long and remarkable track record. But that past performance poses a challenge to the quants who currently work on the trading system.

Consider AHL Diversified, a well-known product based on the program. In the 12 years from its introduction in 1997 through 2008, AHL Diversified never had a down year. (It did have down months, of course). And it performed exceptionally well at times of crisis like1998, when Russia defaulted on its debt and Long-Term Capital Management collapsed. That year AHL Diversified made 41%. In 2008, it demonstrated its crisis-insurance quality again, returning 33%.

But in 2009 AHL Diversified made its first yearly loss, and a big one—almost 17% in the red. The next year it largely recovered but in 2011 lost about 7%.

This year AHL Diversified was up 2.5% as of the end of February, which beats the BarclayHedge managed futures index by a wide margin. Nevertheless, questions remain.

It has been argued that larger assets tamp down on the performance of quantitative trading programs. There are studies showing that smaller funds tend to have higher returns. Is AHL too big?  Investors have moved elsewhere to an extent. One competitor that received a lot of money is Winton Capital, with  $26 billion in assets reported last year.

While AHL has shrunk, $21 billion is still substantially greater than the assets of five years ago. There is no obvious reason why AHL can’t accommodate those assets. It has moved into new markets and futures exchanges, so there should be more trading opportunities.

Have the computer models become obsolete with time? But Man Group has teams working to improve the models. It may be that the 2009 and 2011 losses were the result of extreme conditions – economies started to emerge from the Great Recession and then the Greek and other sovereign debt problems cropped up – that are unlikely to repeat.

The question is whether the quants can manage to approximate the outstanding performance of earlier years.

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