Hedge Funds Pile Into Copycat Quant Trades They Once Derided

Wall Street’s half-trillion-dollar business cloning quant trades has some surprising new customers: the very firms whose strategies it mimics.

Once hostile to the copycat products being churned out by big banks, hedge funds are becoming a major driver of the boom in what are known as quantitative investment strategies, or QIS.

These tools take popular systematic trades and typically turn them into swaps or structured notes, creating a quick and cheap way to gain exposure. They’ve long drawn fire from hedge funds for being pale imitations of the sophisticated strategies they replicate, which were often developed in academia and pioneered over decades by the likes of AQR Capital Management and Dimensional Fund Advisors.

Yet money managers are increasingly giving in to the sheer convenience of QIS.

Pierre de Saab, who trades options at Geneva-based Dominice & Co., is among them. He’s written research arguing the rigidity of QIS means they do worse in market selloffs and can’t replace hedge-fund managers like him. Yet last year he began using the vehicles himself as a handy way to put on new positions.

“It can be challenging to hire a trader every time you want to do something new,” said de Saab, a partner at Dominice, which runs $1.5 billion. “You can use QIS as a starting point, and also as a way to outsource execution so that your staff can work on higher added-value tasks.”

While he declined to provide details of the specific strategies he uses, de Saab said the trades now make up about 5% of his portfolio.