Trust a brainy quantitative macro manager like David Harding and his team of Ph.D.s to try to improve upon long-only passive index investing with an equity fund that aims to reduce volatility and mitigate risk. Harding’s London firm, Winton Capital Management, recently won regulatory approval in Europe for the Winton Global Equity Fund, a systematic, highly scalable long-only fund designed to outperform the MSCI world index by 2 to 3 percentage points, with markedly less volatility.
Before launching Winton in 1997, Harding co-founded London-based quant fund manager Adam Harding & Lueck, now part of Man Group under the name AHL. His current firm, which oversees $16 billion in assets, isn’t the first hedge fund shop to try building a long-oriented quant-driven equity fund with lots of room for investors; James Simons, founder of East Setauket, New York–based Renaissance Technologies, launched the Renaissance Institutional Equities Fund in 2005. Simons asserted at the time that this long-biased fund — fashioned to outstrip the Standard & Poor’s 500 index — could handle up to $100 billion.
At its peak in December 2006, RIEF managed some $14 billion in assets. But liquidity-starved investors pulled back during the economic crisis, even though the fund was beating its benchmark. Assets now sit at about $5.2 billion.
Whether the Global Equity Fund can avoid a similar fate remains to be seen. Still, Harding — Winton’s founder, chairman and head of research — says he’s convinced an unleveraged long-only fund with low fees and an integrated approach to risk can stand out in “a large and rather undistinguished market” of long-biased quant offerings. Winton is just one high-profile London hedge fund firm seeking to take advantage of Undertakings for Collective Investment in Transferable Securities (UCITS), a European regulatory designation that allows asset managers to market a collective investment fund across the European Union based on authorization from a single member state. Others with UCITS-approved funds include Brevan Howard Asset Management and Marshall Wace.
Winton’s new fund, managed by head of equity research Mark Precious, capitalizes on the firm’s strength in quantitative analysis. Its flagship Winton Futures Fund, which uses exchange-traded futures and options to invest in up to 120 markets, has an annualized 17 percent net return since inception 13 years ago.
For the Global Equity Fund, Harding and his team have adapted their methods to invest in a single asset class. Although the new fund uses the MSCI world index as a benchmark, the resemblance is superficial. Unlike the index, it doesn’t weight stocks by market capitalization. Most market-cap-weighted equity indexes are dominated by a relatively small number of very large-cap stocks — so much so that the top 10 percent of those holdings usually account for some 50 percent of total weightings, Precious says. In his view, market cap is not a good indicator of return or risk, so the team has designed an array of quantitative and qualitative metrics to determine weightings.
“Most of the weightings will come from risk, and the most straightforward measure of risk is volatility,” says Precious, who joined Winton in 2006 from UBS, where he was co-head of global equity strategy. “We will give low weightings to high-volatility stocks, with the aim of having less concentration of risk than you would have in any market-cap-weighted fund.”
Also informing the weightings are technical and fundamental inputs, including an expected-return component for individual stocks, momentum analysis and Winton’s own fundamental analysis. Harding and Precious began road testing the long-only equity strategy in June 2008 with $10 million of their firm’s capital. Since inception through October 31, 2010, the fund returned a modest 3.2 percent but outperformed the MSCI world index by 20.4 percentage points.
In 2010 the Global Equity Fund is up 9.81 percent, beating its benchmark by 281 basis points. Given institutions’ need for better long-only management in the wake of the crisis, Precious is confident the fund will attract interest. It has a management fee of only 20 basis points (zero until March 25) and a 20 percent incentive fee on relative outperformance.
Harding is preparing for the challenge of introducing an unusual fund to Winton’s institutional clients — not least because it’s a shift in focus for the firm. “Our current clients are hedge fund investors; the long-only guys are down the corridor to the left and behind the potted plants, so it will take us some time to reach them,” he says with a laugh. “But we are cautiously optimistic that we will.”
