Quest Partners is betting on a future where hedging finally matters

After 23 years in quantitative hedge funds and managed futures, Michael Harris retired from Campbell & Co. in December 2019 because he felt he was losing the battle to uphold a fundamental principle of investing: the need to cover up. “Investors kept saying, ‘I’ll come back to it later when I need to,’ but we continued year after year where they just didn’t need it,” Harris recounted. “We had a period of more than 10 years where people felt that everything was fine and that we didn’t need to diversify. It’s become more and more frustrating trying to sell these kinds of strategies.

Two months after his retirement, the pandemic crippled the global economy, sending markets into a tailspin. But the cover still hasn’t had its day. The Federal Reserve did exactly what everyone had expected of it for years: bail out the markets. The first trimester was nasty, but then, as Harris put it, we “had the mother of all recoveries.” Recipients questioned the underlying sustainability of the rally and central bank policy, but not for long. “There was that nanosecond [when they thought] “Maybe I should pivot.”

However, the past six months may have finally changed investors’ minds.

Harris saw an opportunity to return to the world of hedge funds, this time as chairman of Nigol Koulajian’s quantitative firm Quest. In his first interview since joining the company earlier this month, Harris spoke to II on how he views his tenure for the $2.5 billion company.

Although Harris’ plans hinge on performance, that’s the one thing he declined to comment on during the interview. But according to other people familiar with the fund, the firm’s flagship strategy has returned 23.6% year-to-date through the end of May. Few need to know that the S&P 500 and Nasdaq were down around 14% and 24%, respectively, over the same period, or that both indexes suffered additional losses in June.

Along with freeing up Koulajian to focus on the bigger picture while he manages the company’s day-to-day operations, Harris is looking for ways to bolster Quest’s capabilities.

“Our asset level has increased and we are getting closer to capacity in our core strategy,” he said. “Another reason I think the company hired me is to come in and continue to help them think of new ways to grow our existing strategies beyond our current capacity projections,” he said. -he declares. While the company has told clients it will likely have to put new investments on hold at $3 billion, Harris pointed out that most companies, including Quest, lack the ability to firmly forecast a number of maximum capacity.

“You come in with a conservative number, and as you get closer to that number, you’re looking at real data. If the costs go up significantly, you’ll probably have to brake even sooner,” he said.

The company is actively researching a number of different areas, including exploring new methods to keep trading costs lower. “Trading costs for a short-term manager can be decisive. If the costs are too high, your alpha is swallowed up by these costs,” he said.

Quest is also looking for both new markets it can add and new strategies it can use, whether it’s an entirely new source of alpha or existing alpha that has a time horizon. different. A longer-term initiative is to research new products that the company could potentially offer. “We don’t need to be a one-strategy store. We’ve made a name for ourselves in this short-term space, but there may be others,” he said.

The most common question Harris gets from potential investors and clients — and perhaps journalists — is whether it’s too late to invest. His short answer is no, and it’s a question that informed his decision to join Quest.

His longer answer, which underlies the work he does, is about inflation, the pandemic, the war between Russia and Ukraine, and the interrelatedness of these three big macro issues. Experts initially thought each of these issues would be transitional. But for Harris, it’s a bigger regime change that Quest can benefit from. “I can’t point to something that will come up and fix things in the next 30 days,” he said.

Harris reminded me of a conversation about commodity trading advisors we had in 2018. “CTAs and quantitative managers tend to make money when things are happening. We went from one big thing to three big things, with no end in sight,” he said.

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