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Overview: Statistical Arbitrage
The HFN active and inactive databases contain over 60 unique fund products with a primary investment strategy focused on statistical arbitrage. The commercial database contains 16 active funds, 2 of which are structured as UCITS. HFN tracks an additional 9 unique funds which focus on volatility arbitrage which have characteristics similar to statistical arbitrage strategies. Performance and Equity Volatility
•Statistical arbitrage funds were +1.72% in July and -1.23% YTD 2011. This compares to +0.37% YTD for equity hedge fund strategies, +4.60% for credit, -0.50% for commodity strategies and +0.72% for the broad hedge fund industry.
•Volatility arbitrage strategies were -0.30% in July 2011 and -1.85% YTD 2011.
•HFN estimates total hedge fund assets invested in statistical arbitrage strategies were $32.43 billion at the end of July 2011.
Statistical arbitrage (stat arb) strategies vary widely in terms of position holding time horizon and style, but the similarity across all of these funds is the fully quantitative nature of trade construction and execution. Position holding periods vary from fractions of seconds where algorithms attempt to find opportunity in market microstructure dynamics, to days or even weeks when the perceived arbitrage opportunities are geared towards mean reversion across similar securities. Lastly, stat arb is often part of larger, multi-strategy platforms which indicates the AUM is spread beyond pure stat arb funds.
Statistical Arbitrage and other Quantitative Fund Characteristics
The aggregated qualitative details of statistical arbitrage strategies in the HFN database give an indication of the collective characteristics of the group in the entire industry.
•There is a larger than average concentration of stat arb funds operating out of Europe than the U.S. Paris in particular is home to a larger than normal percentage of funds.
•Stat arb fund launches peaked in 2007 before stalling during the financial crisis. Launches resumed in 2009 and remained elevated through 2011.
•The average stat arb entity has $317.8 million in strategy assets, compared to the average equity strategy size of $207.8 million and average industry aggregate size of $333.04 million.
•Half of the stat arb funds listed on HFN explicitly denote market neutrality as central to their strategy.
Total Asset Levels and Flows Estimates
Despite the presence of new fund launches stat arb AUM has meaningfully declined since reaching a post crisis peak in early 2010.
•HFN estimates total assets invested in stat arb strategies at the end of July 2011 were $32.34 billion. Early estimates for August show AUM likely increased during the month counter to the broad industry.
•Total AUM has decreased 16% in the first seven months of 2011, or $5.9 billion. AUM decreased 3% in 2010 after climbing to an all-time peak of $42.5 billion in March of that year.
•Performance has reduced AUM an estimated $670 million in 2011 which indicates an asset weighted performance of -1.64%. Comparing this figure to the equal weighted performance of -1.23% indicates larger funds stat arb funds have performed worse than smaller funds in 2011.
•Stat arb investors have withdrawn an estimated $5.3 billion for a core decline of 14% compared to a core increase of 2.5% for the overall industry.
Performance and Equity Volatility
Figure 10 shows the returns of statistical arbitrage funds, relative to equity strategy performance, compared to the VIX. Monthly VIX averages were calculated using daily close figures.
•In relatively volatile environments, measured by monthly VIX over the historical average, statistical arbitrage funds tend to outperform equity strategies. The converse also holds true; in calm environments statistical arbitrage funds tend to underperform equity strategies.
•Since 2002, statistical arbitrage funds outperformed equity strategies by +0.62% on each month the monthly VIX was above its historical mean, on average. Below average monthly VIX showed underperformance for statistical arbitrage funds of -0.72% relative to equity strategies.
•Early 2009 was an exception to this trend, possibly attributable to managers’ beliefs of sustained volatility in the equity markets following the financial crisis.
•The trend is even more pronounced when measured against the change in volatility measured as month over month change in monthly VIX averages. Upward sloping volatility showed a +0.97% (+1.22%) outperformance by statistical arbitrage (volatility arbitrage) funds compared to equity strategies and a -1.22% (-1.38%) underperformance in downward sloping volatility environments.
Going Forward
Although recent media coverage of “black box” strategies may leave statistical arbitrage out of favor with certain investors, contained variance and relatively low correlations to other more common hedge fund strategies (see page 5) make it an attractive option.
Despite recent trends in investor sentiment, the current environment may be a boon to statistical arbitrage funds with investors looking for safe harbors in relative value strategies. Equity markets were volatile in August with upward VIX movement contrasting sharply with recent history. It seems statistical arbitrage funds were better positioned than most showing an early estimate of -0.08% compared to equity strategies posting -4.33% for the month. The coming months will be crucial for statistical arbitrage funds with accurate interpretation of uncertain markets, on an absolute basis and relative to other funds, required to stem the momentum behind further redemptions.
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