Asset Management: Millennium’s secret weapon

Inside WorldQuant’s ‘Alpha Factory’

When Igor Tulchinsky was deciding whether to join hedge fund Millennium Management three decades ago, the Belarusian former video game programmer eschewed the systematic, data-driven approach that is characteristic of “quants” like him. He simply flipped a coin.

It was not “so that chance shall decide the affair, while you’re passively standing there moping”, to quote a poem by Danish scientist Piet Hein. “But the moment the penny is up in the air, you suddenly know what you’re hoping.” 

The coin toss dictated that Tulchinsky should stay at his current employer, options trader Timber Hill. But when he announced the decision to Millennium, “I felt so bad,” he told me and my colleague Robin Wigglesworth in a rare interview. So he changed his mind and quit Timber Hill for Millennium.

His about-face turned out well for Millennium’s investors. Tulchinsky became one of its top portfolio managers, and in 2007 spun out a quantitative investment manager, WorldQuant, to manage money for the now roughly $60bn-in-assets hedge fund group. Over the past 15 years WorldQuant has grown into one of the largest and highest-contributing units at one of the world’s top hedge funds.

Its model is to produce algorithms that try to predict the price movements of various financial instruments, typically equities, and then take advantage of inefficiencies in the markets. Tulchinsky, whose intense gaze and head-to-toe black attire give him the air of a James Bond villain, refers to these algorithms as “alphas” and to WorldQuant as the “Alpha Factory.”

Don’t miss the full story of Tulchinsky’s unlikely career path, how WorldQuant is trying to stay ahead by diversifying into new areas like high-frequency trading and corporate bonds, and the company’s unusually decentralised global workforce.

Its offices in 13 countries are spread across many non-traditional financial centres, such as Ramat Gan, Israel; Budapest; Mumbai; Ho Chi Minh City and Seoul. The business is built on the premise that “talent is distributed equally around the world, opportunity is not”, says Tulchinsky. “And we provide opportunity to the talent.”

A new golden age for short selling?

Hedge fund short sellers have hardly enjoyed the best of times during a decade or more of a seemingly never-ending bull market. This year their luck finally appears to have changed.

The best known tool of the hedge fund industry, and one of its most controversial, short selling is back in fashion, writes my colleague Laurence Fletcher. That is thanks to the end of what former Soros Fund Management investor Renaud Saleur, who now runs Geneva-based hedge fund Anaconda Invest, calls the “fantasy” market, or the “everything rally” that lifted both good and bad stocks with little differentiation during the coronavirus pandemic.

This year’s huge sell-off in the speculative technology sector has provided a wealth of opportunities for managers, with Goldman Sachs’ Unprofitable Tech index falling 60 per cent as rising interest rates make such companies’ future cash flows far less attractive.

Another area of opportunity has been the cryptocurrency sector, where bitcoin miners have become the latest target. Lossmaking Marathon Digital, for instance, is one of the most shorted stocks in the US market. The firm paid its former chief executive nearly $220mn in stock awards last year but since has then fallen well short of its mining and profitability targets.

Hedge fund managers say that their shorts have been delivering the best returns in years. But it remains a tricky business navigating vicious bear market rallies and rising stock correlations. Meanwhile “speculative technology” is no longer the obvious short that it was at the start of the year.

Short sellers made millions during the dotcom bust two decades ago and again betting against the banks during the 2007-08 financial crisis. If the current bear market turns out to be anywhere near as bad as Elliott Management or Saba Capital’s Boaz Weinstein have recently predicted, then short selling could be entering a new golden age.

Chart of the week

The metaverse has become the hottest concept ever in the history of exchange traded funds — despite steady media coverage suggesting there has been little interest in the “sub-theme”.

A total of 35 metaverse-badged ETFs have launched globally since the first rolled off the conveyor belt in June 2021, according to data from Morningstar, writes Steve Johnson.

This exceeds the number for any other “sub theme”, according to Morningstar classifications, ever, trumping the 32 for internet ETFs, 29 for blockchain ones, 23 for cloud computing and 22 for cyber security.

The avalanche of launches has come despite an embarrassing lack of traction for many early offerings in the metaverse — a futuristic immersive version of the internet enabled by virtual and augmented reality.

Even Meta Platforms, which was so enamoured by the concept that it changed its name from Facebook to “reflect its focus on building the metaverse”, has started to lay off workers associated with the project.

But when it comes to ETFs, “we have seen very, very fast uptake”, said Kenneth Lamont, senior fund analyst for passive strategies at Morningstar. “It’s the quickest ever.”