DJ Quant Funds Gain A Foothold In Brazil's Expanding Market

03/11/2010

DJ Quant Funds Gain A Foothold In Brazil's Expanding Market

   By Kenneth Rapoza

   Of DOW JONES NEWSWIRES

SAO PAULO (Dow Jones)--Love them or hate them as an investment vehicle, "quant" funds are seeping into Brazil as local fund managers look for new, niche ways to beat the market.

Brazil's 1.4-trillion-real ($785 billion) investment fund industry saw more than 600 new funds launch in 2009.

As the fund market expands, investment houses are turning to complex algorithmic computer platforms to devise in-house, quantitative models that bring both strategic and high-frequency computerized trading to one of the world's hottest markets.

"It's easier to replicate performance in the long run using a quantitative model, because it is systematic and scalable," said Franklin Reilly, director of institutional distribution at U.S. Boston Capital Corp, distributors of the $950 million Quantitative Group of Funds.

"When financial information becomes less asymmetrical, easily accessible, and more regulated in emerging markets like Brazil, then quant model funds are easier to build and can add value to investment houses," he added.

Reilly expects the number of quant funds to grow, but slowly.

The idea behind quant funds is a simple one: if computers can beat Russian chess champions, they can beat Wall Street traders. An analyst can program criteria into a computer and the computer does the work of a team of analysts and fund managers, buying and selling securities according to the model.

Some quants are designed to exploit very short-term market opportunities, while others are designed for longer-term moves and are more strategic, like Boston Capital's Quant Fund family.

"From the point of view of a money manager, quantitative funds are just another way to manage money. It is programmed by an analyst and the computer runs the trade based on the model. This is a new product for Brazil," said Thierry van Eyll, a partner and manager of Banco Patria.

Patria developed its own in-house quant fund in 2006 and opened it to investors two years later. Quant funds account for just 30 million Brazilian reals ($16.8 million) out of a total equity and fixed-income portfolio at the bank of BRL1.5 billion.

Much of the algorithmic trading backbone in Brazil is built by a privately held company called CMA. It recently launched an algorithm platform for Brazilian futures trading, a first for that market.

This month CMA is heading into Colombia to launch its order management system, or OMS, platform for the Colombian Stock Exchange. With the technology in place, funds can devise models to carry out strategies such as playing one market against another, Colombia against Brazil, for example.

The Brazilian Stock Exchange already has such platforms, making it the first in Latin America to make quant funds a possibility.

Only around 6% of shares are traded through some form of automated system, compared to nearly 70% for Nasdaq and the New York Stock Exchange, according to CMA. With such a small percentage of automated trading, concerns about systemic risk in the Brazilian market haven't emerged.

CMA's products compete with SunGard Financial Systems' popular GL Stream order and execution management systems, and have the same kind of colorfully named, built-in trade platforms--so-called "iceberg" or "guerrilla" trading--that U.S. quant funds know well.

"The prospects for growth in emerging markets are very strong," said SunGard's Global Head of Connectivity, Philippe Carre. "We were early movers in Asia Pacific. Brazil and Mexico are growing, but quant trading is still at a relatively early stage of development outside the U.S.," he added.

While quant funds require some genius to build, and may be cheaper to develop because they don't require a dozen sector analysts to recommend stocks, their success rate doesn't always beat traditional stock-picking methods.

"Even though the Bovespa index rose over 80% last year, our models didn't capture those gains," said Rafael Mastrocola, investor relations manager at Principia Capital in Sao Paulo.

Principia was the first quant fund in Brazil, with former Merrill Lynch technical analysts setting up shop in 2003 and launching their first fund in 2004. Principia has two quant funds, the Hedge Plus and the Principia ABS.

The quant market is growing for Principia. In 2008, it had just BRL20 million in net assets under management. A year later, Principia has BRL200 million in its quant funds and is now developing an off-shore product.

U.S.-based quant funds had $357 billion invested abroad--including emerging markets such as Brazil--in 2009, up from $291 billion in 2008, according to PanAgora Asset Management, a quant fund manager in Boston.

-By Kenneth Rapoza, Dow Jones Newswires, 5511-2847-4541, kenneth.rapoza@dowjones.com

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(END) Dow Jones Newswires

March 11, 2010 07:39 ET (12:39 GMT)

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