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Take Emotion out of the Equation

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Stockholm (HedgeNordic) – Money managers frequently operate in the context of risk and uncertainty, even more so in a market environment coloured by out-of-control inflation, impending recession, an ongoing war, a looming energy crisis, among others. Taking risks and making decisions in the face of uncertainty is certaintly a complex and error-prone process. Luckily, systematic and rules-based investment approaches can help take human emotions out of the equation when trying to stick to a long-term strategy.

Thomas Nygaard, the founder of Oslo-based quantitative asset manager NorQuant, has observed the trend of larger, longer-term-oriented investors such as family offices and institutional investors starting to use a quantiative approach to investing in order to reduce risk, save costs, and increase returns. “The asset management industry used to be based on a lot of qualitative analysis, where analysts had to travel around to visit companies and talk to management teams,” says Nygaard. While this qualitative research is still essential for price discovery, “more and more research shows that a quantitative approach provides superior results at lower costs.”

Having launched rules-based multi-asset fund NorQuant Multi-Asset in January 2021, Nygaard acknowledges the benefit of taking human emotions out of the investment process. “We have experienced uncertain times since we started the fund in January 2021, and it can be very tempting for a manager to adjust a little bit, or wait a little bit or do something else when the really unusual is happening,” says Nygaard. “We haven’t seen any evidence suggesting that employing a more active discretionary approach would have improved our returns.”

“Our rules-based model is not dependent on me, on my market views or any of my colleagues.”

“Our rules-based model is not dependent on me, on my market views or any of my colleagues,” elaborates Nygaard. NorQuant consider the market has fully priced in all available information, investor views or fears, with their quantitative strategy designed to create a stable, well-diversified portfolio able to access differentiated sources of return across different asset classes. “We believe everything is priced in the markets, so we put together a strategy that is not dependent on us predicting any market developments.”

Multi-Asset Momentum Model

NorQuant Multi-Asset employs an asset class momentum strategy implemented using exclusively exchange-traded funds (ETFs) across four liquid asset classes – equity, bond, real estate and commodity. The main cornerstone of its rules-based strategy is getting exposure to momentum in asset classes. “The momentum factor, of course, is mostly known for individual stocks, but there is a lot of research discussing the momentum effect at the asset class level,” explain Nygaard.

“The momentum factor, of course, is mostly known for individual stocks, but there is a lot of research discussing the momentum effect at the asset class level.”

The momentum effect is most frequently measured based on a trailing 12-month period, but many studies also report momentum-investing success over shorter time windows of six and nine months, according to Nygaard. “Therefore, we use different ways and windows to capture momentum.” NorQuant Multi-Asset relies on the ensemble averaging process of creating multiple models – based on how momentum is measured and the horizon over which it is measured – and combining them into a strategy-of-momentum strategies as opposed to using just one model. “We are using the ensemble approach that is also used in machine learning to limit the risk of overspecifying the model,” says Nygaard. “We are trying to avoid the biggest mistake one can do when designing a rules-based strategy, which is overfitting on past data.”

“We are trying to avoid the biggest mistake one can do when designing a rules-based strategy, which is overfitting on past data.”

Subject to a number of asset class-level limits, NorQuant Multi-Asset seeks to capture momentum across equity, bond, real estate and commodity markets using ETFs. The rules-based fund can allocate up to 100 percent in equity ETFs, a maximum of 70 percent in bond ETFs, and a maximum of about 40 percent in commodity and currency ETFs, respectively.

“Equities has been the best performing asset classes over many decades, so our model can allocate 100 percent to this asset class,” explains Nygaard. The strategy can reduce the allocation to equities to zero in an extreme and prolonged crisis, but will likely always maintain some equity exposure. Having started with a 75 percent allocation to equities in January 2021, NorQuant Multi-Asset reduced its equity exposure to below 25 percent earlier this summer.

Currently exposed to four asset classes only, the NorQuant team continues to evaluate the possiblity of adding new asset classes to its investable universe. “If new types of asset classes emerge, or if existing asset classes become available for investing in a cheap and efficient way, we will definitely consider expanding our universe,” says Nygaard. “We are looking for liquid asset classes that are uncorrelated or little correlated with the asset classes we are currently investing in,” he continues. “For our portfolio optimization, we want to add asset classes that make our multi-asset portfolio more robust and diversified, not less.”

Diversification – the Only Free Lunch

By employing a multi-asset approach to investing, NorQuant Multi-Asset seeks to capitalize on the only free lunch in investing: diversification. “Diversification is perhaps the best word that describes our strategy,” says Nygaard. Warren Buffett has long been a proponent of owning a well-diversified portfolio of stocks via ETFs as a means of building wealth over time. “What we have done with multi-asset investing is taking one step further,” emphasizes Nygaard. “Instead of only investing in stock indices, we also saw the opportunity to get exposure to other asset classes through cheap, and efficient ETFs.”

“Diversification is perhaps the best word that describes our strategy.”

“Over long periods when stocks don’t generate much return, our strategy has the opportunity to get returns from other asset classes,” says Nygaard. NorQuant Multi-Asset can invest in a wide range of ETFs, starting from equity ETFs offering exposure to U.S. or European equities to broad-based commodity ETFs offering exposure to different commodities.

“The fund has returned over 20 percent in Norwegian kroner since we launched in early 2021, and quite a bit of that return comes from commodities, of course,” reveals Nygaard. “We have had a real bull market in commodities and the fund capitalized on that, but we also made money in the bond markets, via our investments in U.S. government bonds,” he elaborates. “This shows that our model is quite dynamic and that we managed to capture asset class momentum across different asset classes and regions, even bond markets.”

“After spending many years developing a rules-based strategy and computing hundreds and thousands of simulations with different parameters, our main conclusion is to keep it simple,” concludes Nygaard. NorQuant Multi-Asset, therefore, seeks to represent a simple solution for multi-asset diversification.


This article features in HedgeNordic’s “Systematic Strategies” publication.

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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