Hedge Fund CFM Hikes Fee to 30% as Quant Arms Race Escalates

(Bloomberg) — Jean-Philippe Bouchaud is no stranger to challenging orthodoxy in finance. The theoretical physicist turned hedge-fund executive has gained fame for his combative research detailing the flaws of the efficient-markets hypothesis in an era of mindless capital flows, from the meme-stock mania to the index-chasing boom.

Away from his scholarly endeavors, the Capital Fund Management chairman has overseen another bold move: Hiking the performance fee on his firm’s flagship quant fund from 20% to an eye-watering 30%.

The $11.7 billion multi-strategy Stratus fund — which trades futures, options, stocks and more — has gained 8.7% this year through June 30, according to a person familiar with the matter. Taking a bigger cut of trading profits is part of the Paris-based firm’s bid to compete for talent and data in the escalating arms race among tech-powered quants.

“There are not a lot of people in the world able to do what we do,” Bouchaud, CFM’s 62-year-old chair, said in an interview. “It takes all the running to stay at the same place because of increased competition, because of the speed of alpha decay.”

CFM, which oversees $15.3 billion — its most ever — is among hedge funds that capitalized on the post-pandemic volatility when central banks were forced to beat a retreat from the era of near-zero interest rates. It marked a stark shift in fortunes for a cohort of rules-based investors that had been mired in listless trading during an era known as the quant winter.

While CFM is known for trading futures based on market trends and economic signals, it now encompasses a bevy of strategies including options, sustainability and statistical arbitrage, or dissecting the historical patterns in stocks.

CFM’s Stratus gained 18.3% when stock and bond markets swooned in 2022 and posted another 11.3% advance last year, according to the person familiar. The performance stands out compared to the PivotalPath multi-strategy index, an industry benchmark. The Stratus fund remains closed to new investors, aside from replenishing any outflows.

The higher-interest rate era has buoyed a variety of hedge-fund strategies. But Bouchaud also attributes the firm’s recent success in large part to new niche trading styles that demand large investments. That includes allocation ideas built on data like images of parking lots that might reveal consumer-shopping trends, or the pattern of money flows in and out of markets during certain times of the month.

“The market ecology is so complex that it generates these anomalies, these statistical quirks in all sorts of directions,” said Bouchaud. “Having more people, more ideas allowed us to explore this extremely high dimensional space and find more niches than we ever thought were going to be found.”

The firm has nearly doubled its research team to about 90 people in the past five years, he said, and two-thirds of its bets are based on models built after 2018. Meanwhile, it’s also raising money for a rebranded fund called Cumulus that will use versions of Stratus’s strategies and charge a 15% performance fee.

The moves are aimed at allowing CFM to better compete in an industry increasingly dominated by a few multi-strategy giants able to shell out large paychecks to attract top money managers. The quant firm lost a few senior quants this year, including head of directional alpha Samuel Vazquez and head of directional portfolio management Daniel Hoehener.

Based in Paris’s Left Bank and founded in 1991, CFM can seem more like a university classroom than a cut-throat trading floor evoked by larger rivals like Millennium Management.

It’s able to compete on pay, but its collegiate spirit offers an alternative for those put off by bruising internal competition at Wall Street firms and the like, according to Bouchaud.

“You attract talent if you have interesting things to say,” said the executive, who has kept up his side job as a statistical physics professor at the Ecole Normale Superieure. “Otherwise they only come for the money.”

Bouchaud, who has been chairman since 2000, has done his part. Much of his research has centered on market impact, or how trades can move asset prices. It’s a subject that’s gained renewed relevance at a time when investors are increasingly scrutinizing money flows, rather than just fundamentals, to gauge the direction of stocks.

A recent paper he co-wrote, for instance, expounded on how exchange-traded funds can create self-fulfilling cycles where inflows push up the prices of the underlying stocks, which in turn boosts performance. The three authors called it “Ponzi Funds,” with an anonymized example that looks like Cathie Wood’s ARK Innovation ETF. (ARK Investment Management did not respond to a request for comment.)

Based partly on the work of late economist Fischer Black, Bouchaud’s world view is that security prices can stray away from their true value by a large margin for years, before eventually reverting back. That may seem uncontroversial to anyone who has witnessed the dot-com boom or day-trading frenzy. Yet it defies Eugene Fama’s efficient-markets hypothesis, which has ruled traditional quant models for decades.

“People still in academia and also in traditional investment cycles — they tend to belittle completely the amplitude and also the persistence of these impact effects,” he said. “I’m absolutely convinced that this is a much better story than the efficient-markets story.”

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