See Bloomberg’s SPOTLIGHT interview profile of QuantZ today

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06.19.12 www.bloombergbriefs.com Bloomberg Brief | Hedge Funds 12
Spotlight
QuantZ Capital’s Milind Sharma on Applying a ‘Macro Overlay’ to Quantitative Investing
a slow, gradual thing? in the higher order effects, namely what
Milind Sharma, CEO of New York-based A: We’re really betting on the second does that do to vol and dispersion and
QuantZ Capital Management Ltd., spoke order effects. Regardless of whether you stock correlation and all those things.
to Bloomberg’s Nathaniel Baker about his have the big event or not, it’s going to be The macro stuff translates directly into
views on the global macro picture and how the fact that in the last couple of years
a big unwind because there’s no ways to
these are incorporated into his hedge fund’s you’ve seen record high stock correla-
strategy. get rid of the debt instantaneously. The
real issue near term is whether Angela tion. That makes it very difficult for a
Merkel and Europe can take a page fundamental, bottom-up stock picker to
Q: Your fund was in the top 3 percent in out of our history book from Alexander outperform. The other issue is that when
the Bloomberg database last year and Hamilton’s experience and apply it to Eu- you’re in a sideways to downward bear
recently won the Battle of the Quants. rope. Even if they do, it’s difficult to see market, the typical long/short process
What’s the strategy, exactly? how the world can magically heal itself. doesn’t work well. Because most long/
Because we’re still looking at a potential short funds are essentially levered beta
A: We’re ‘quantamental,’ which means
hard-landing scenario in China, India’s riders. They see a rally, they load up and
a hybrid of quantitative-driven on the
not in great shape with inflation, the jump on. Not to mention that with the
securities selection side with some macro
Japanese have plenty of their own debt pressure on expert networks and Reg
adjustment/macro overlay, if you will.
to worry about and are only 23 years into FD it’s gotten much harder for many of
their bear market, and we’re 13 years into these managers to do what they used
Q: Quantamental. I like that. How does
ours. We see the ‘lost decade’ in stocks to do. Plus, with the relative volume in
the macro overlay work?
– not the one that just happened, but ETFs rising dramatically, you’ve got an
A: It’s taking our house view and environment where a process-driven
the one that’s likely to come – to act like
combining it with a regime-switching ap- strategy can tweak the right levers to
a dampened oscillator. This means that
proach. Basically forecasting probabili- take advantage of these issues.
each successive episode of quantitative
ties, which then drive the portfolio tilt
easing will be less and less effective. As
and overall portfolio orientation. There’s Q: Isn’t there a lot of upwards/down-
an example, this is the third year in a row
a lot of moving parts. wards/sideways movement as we go
that we’ve seen a very serious déjà-vu
script playing out; you get a very strong along here?
Q: So what are your macro views then?
first quarter, market peaks in April or A: Exactly. In general, one should expect
A: We sound like a broken record in May, then you get a summer swoon. For much higher volatility and correlation in
terms of our perma-bearish outlook but the third year in a row we’ve been justi- these bear market cycles. That’s some-
that’s because frankly we see either a fied in being cautious that once the sugar thing a quant process can take advantage
‘checkmate’ or a ‘stalemate.’ We don’t high of quantitative easing wears off, the of. We for instance are always implicitly
see any great scenarios that can come same script plays out. What I’m saying is long vol/long dispersion. But we can
out of this massive deleveraging cycle. that at some point you’re going to have choose to be long correlation/short cor-
We’re in the camp of this being a great an episode of QE perceived not as a relation by tweaking our ratio bets on
stagnation/deflationary bust or secular license to melt up, but as sheer despera- idiosyncratic versus common factor risk.
bear market. tion on part of the Fed.
Q: I think you just lost me.
Q: What are your big concerns? It Q: How are these views translated into A: It’s very difficult for fundamental man-
sounds like this goes beyond Greece your strategy exactly? How does that agers to even measure their idiosyncratic
and European sovereign debt? mechanism work? versus common factor levels, much less
A: That’s right. All of the above plus of A: As I mentioned we’re more interested take advantage of that.
course the domestic issues: your fiscal
cliff, the $46 trillion of unfunded liabilities,
trying to solve the debt overhang with
more debt and the possibility of a disor-
Age: 40
derly default or disorderly decline in one
of the major reserve currencies. At the College/University/Grad School(s): Oxford, Vassar, Carnegie Mellon, Wharton
end of the day, we believe that enough Professional Background: MLIM, ran proprietary stat arb portfolios at RBC
cans have been kicked down enough
roads in enough countries that some- and Deutsche Bank AG, the latter under Boaz Weinstein.
thing’s got to give at some point soon. Mentors: Boaz Weinstein; Bob Doll, vice chairman of BlackRock.
Q: Will this be a big event or more like Charitable Work: Ti Kay Haiti (www.tikayhaiti.org)
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