December 31st, 2024 -- Weichuan Deng, Oleg Kolesnikov, Amit Sardar & Milind Sharma
This blog presents a Q4 2024 update of each of QMIT's flagship HFIB EMN [QUMN] & LBO EMN [QLBO] strategy indices followed by an analysis of the virtues of a 50/50 Combo which has a much better adjusted profile given the combination of strategies with low correlation of ~25% -:
Both strategies are now tracked independently by TMX - Canada's largest exchange - and can be found using following links:
Sortino of 3.46; Sharpe of 2.08; MaxDD -12.96% CAGR +20.77% with 9.98% vol:
QMIT's HEDGE FUND IN A BOX -- Background & peers
The QMIT "HEDGE FUND IN A BOX" (HFIB) index is a fully risk-optimized equity market neutral hedge fund portfolio accessible via bank swaps or structured products. Published daily (6Y LIVE), it is based on the flagship Sizzling Seven multi-factor model constructed by combining 18 machine learning Enhanced Smart Betas (ESBs) via ensemble learners. By maintaining dollar & beta neutrality without leverage, it eliminates directional risk. The inclusion of multiple strategies—Earnings Torpedoes, Mean Reversion, and SIRF—allows the portfolio to capitalize on various market inefficiencies in addition to the hundreds of factors embedded within the ensemble of 18 ESBs. The strategy enforces tight controls on net sector and industry exposures (±2.5%) and maintains beta neutrality within a narrow range of [-0.01, 0.01], ensuring minimal sensitivity to market movements. Individual stock weights are capped at 1.5% on both the long and short sides, reducing idiosyncratic risk. Additionally, by achieving naïve factor neutrality across five key factors (typical of risk models like Axioma), the strategy focuses on pure alpha generation. The portfolio typically holds 75 long vs 75 short positions, providing robust diversification. The composite signal benefits from diversification across uncorrelated ESBs and exposure to exotic risk premia on the most liquid ~3000 North American stocks and ADRs. While there does exist 25Y of HFIB history (including 19 years of back-tested returns from 2000-2018), for the purposes of this study we only focus on the 6Y LIVE daily published returns (based on daily rebalancing) for HFIB & peer funds. QMIT’s HFIB strategies are inclusive of transaction costs and short rebates but gross of fees (as is the norm for an index). The three prominent peers used for this study are:
JMNAX (JPMorgan Market Neutral Fund)
QMNNX (AQR Market Neutral Fund)
VMNFX (Vanguard Market Neutral Fund)
Our flagship strategies like the HFIB EMN & LBO are now being tracked as indices by banks in Bloomberg as well as by index providers as the underlying for swaps & notes in order to facilitate such exposure. The 6 year live performance of our Top vs Bottom flagship signal spreads (e.g. Sizzling Seven) and the corresponding risk-optimized HF portfolio (HFIB) leaves prominent quant EMN hedge fund peers biting the dust.
HFIB boasts an impressive annualized return of 27.32%, which is a multiple of the returns of QMNNX at 7.71%, VMNFX at 3.89%, and JMNAX at 5.59%. When considering risk-adjusted returns, HFIB's advantage becomes even more pronounced. The strategy achieves a Sharpe Ratio of 1.98, indicating exceptional efficiency in converting risk into returns compared to QMNNX's 0.81, VMNFX's 0.56, and JMNAX's 1.01. Similarly, the Sortino Ratio for HFIB is 3.17, significantly higher than the ratios for QMNNX (1.16), VMNFX (0.75), and JMNAX (1.41), highlighting better downside risk management. In terms of capital preservation, HFIB exhibits a maximum drawdown of 16.61%, which is notably lower than the drawdowns experienced by QMNNX (29.5%). Substantially higher returns with controlled risk underscores HFIB's robustness and its effectiveness in delivering superior, risk-adjusted performance over the period analyzed.
Reviewing Table 3, the annual returns from 2019 to 2024 YTD, it's clear that our HFIB EMN strategy has consistently outperformed its peers—QMNNX, VMNFX, and JMNAX. Notably, in 2021, HFIB achieved a remarkable return of 79.1%, significantly surpassing the next best performer, VMNFX, which returned 23.24%. Even during challenging years like 2019 and 2020, when some competitors experienced negative returns, HFIB maintained positive performance. Over the cumulative period, HFIB more than QUADRUPLED at +326.0%, far exceeding the cumulative returns of 56.11% for QMNNX, 25.74% for VMNFX, and 38.56% for JMNAX.
Examining the monthly summary statistics over a 19-year backtest period, supplemented with over 6 years of live data as of the latest month-end, the HFIB Long/Short strategy demonstrates outstanding performance compared to both the benchmark and the broader market represented by the S&P 500. The HFIB Long/Short strategy achieved an annualized return of 26.02% with an annualized volatility of 11.50%, resulting in a robust Sharpe Ratio of 2.26 which is quite consistent with LIVE period. Additionally, the strategy maintained a relatively low MaxDD of -15.91% (monthly rebal).
In contrast, the benchmark (HFRXEMN Index) recorded a modest annualized return of 0.93% with a lower volatility of 3.69%, leading to a Sharpe Ratio of 0.25 and a Sortino Ratio of 0.34. The maximum drawdown for the benchmark was 20.06%, higher than that of the HFIB Long/Short strategy. The HFIB Long Only strategy also outperformed the S&P 500, with an annualized return of 21.36% and a Sharpe Ratio of 1.12, though it experienced higher volatility and a larger maximum drawdown. Meanwhile, the S&P 500 delivered an annualized return of 7.78% with a volatility of 15.30%, a Sharpe Ratio of 0.51, and a maximum drawdown of 50.80%.
QMIT’s LBO (leveraged buyout) hedged strategy - A liquid proxy for PE
While the HFIB index is rebalanced daily to maintain market neutrality and swiftly adapt to new market information, our LBO strategies—including the LBO100 and Sizzling 35 LBOs - are rebalanced on a weekly basis to reflect the lower turnover of the underlying signal. By aligning the rebalancing frequency with the natural cadence of LBO activity, we effectively capture medium-term signals associated with potential leveraged buyouts. This approach allows us to optimize returns by capitalizing on evolving market conditions while managing transaction costs efficiently in order to provide a liquid proxy for PE without the lockups.
QMIT's Sizzling LBO longs have more than QUADRUPLED in the past ~6Y LIVE while the Top 100 longs have more than TRIPLED as per the charts below!!! Even though LBO Top 100 is now lagging IWN by -4.81%, Sizzling LBO is now up ~+1.47% YTD. For LBO100 this is 1st year in 25Y of lagging the index. For 24Y we have seen positive excess returns (founder has run it live for the last 21Y). ~6Y LIVE the higher-octane Sizzling LBOs fully hedged by IWN delivered 18% ann with 2.39 Sortino. Clearly a compelling but capacity constrained strategy that merits acquiring full capacity in. LBO Top 100 has been traded by the QuantZ founder for over ~20 years & has been published LIVE for clients for over 6Y now - now tracked independently by Canada's largest exchange TMX. Given that our LBO strategy is a liquid proxy for PE style returns (a fact that academics seem to have stumbled upon decades later) it’s worth pointing out that a] the long-term Top 100 mean (over 25Y) of 20.09% ann is already much higher than the long term average ~12% for PE funds as (per Prof Ludovich of Oxford’s Said) b] Sizzling LBO Longs have averaged 27.68% in ~6Y Live which is ~2.3x higher than the average 12% of PE funds c] even the hedged market-neutral pure alpha we’ve seen LIVE ~6Y of 12.71% (Top 100 Hedged) to 18% (Sizzling LBOs Hedged) is substantially higher than 12% suggesting that investors would be far better off from a risk-adjusted standpoint in our PE proxy than being locked up in actual PE funds for a decade.
In the dynamic world of finance, Leveraged Buyouts (LBOs) have been a particularly lucrative strategy, going back to the '80s with the pioneering firm of KKR & the pivotal LBO of RJR Nabisco as chronicled in the Barbarians at the Gate. They have the potential to unlock significant value from underperforming or undervalued companies. An LBO involves acquiring a company but with a significant amount of borrowed money (leverage) to meet the cost of acquisition. The expectation is that the subsequent improvements in performance and strategic restructuring will yield returns that outweigh the interest expense and provide substantial profits upon exit, typically through a sale or IPO. Leverage can either magnify returns or once the cycle turns, the debt burden can often bankrupt the underlying businesses while the PE partners extract rich dividends for themselves while rank & file employees get laid off. While the private equity industry & the corporate raiders (as epitomized by Michael Douglas in the iconic movie Wall Street) have done well for itself with carried interest, one must ask - where are the customers yachts? That remains unclear, after one is done with the long lock ups, lack of MTM/ transparency, layers of fees, “volatility laundering” & other accounting shenanigans. QMIT’s LBO strategy is a LIQUID PROXY FOR PE style returns without the PE shenanigans. Daily MTM & liquidity. Fully transparent No lock ups. No Gates. No shenanigans.
The 50/50 HFIB and LBO Strategies
Our QUMN strategy has been a game-changer, delivering triple-digit gains over a 6-year live performance period. Concurrently, our QLBO models, particularly the Sizzling LBOs, have showcased exceptional returns by pinpointing undervalued companies ripe for leveraged buyouts. By blending these two robust strategies in a 50/50 allocation, we harness the strengths of both—the market-neutral stability of QUMN and the event-driven alpha generation of the QLBO strategies. Below, we present a detailed analysis over a 6-year period, highlighting the performance of QUMN, QLBO, Sizzling LBOs, and their combined portfolios.
QUMN | QLBO | Sizzling 35 LBO | 50/50 LBO | 50/50 SizLBO |
27.32% | -4.99% | 1.47% | 10.15% | 13.90% |
Table 5. 50/50 YTD as of 2024-12-31
The 50/50 combination of QUMN and Sizzling LBOs delivers an annualized return of 13.90%, lower than QUMN's 27.32% while significantly outperforming both LBO strategies individually. More impressively, the combined portfolio achieves a Sharpe Ratio of 2.08 and a Sortino Ratio of 3.46, substantially higher than either strategy alone. This indicates superior risk-adjusted returns, making the combined strategy more efficient in converting risk into return.
QUMN is a weekly TMX index rebalanced strategy, unlike the QMIT HFIB strategies above, which are rebalanced daily. This difference in rebalancing frequency is important when interpreting performance metrics, as weekly rebalancing typically introduces slightly different risk and returns.
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