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How to beat the market: Go ask a robot

<i>Angela Weiss/AFP/Getty Images</i><br/>Investors who've relied on a standard 60/40 portfolio this year have taken a bath as stocks and bonds have tumbled
Angela Weiss/AFP/Getty Images
Investors who've relied on a standard 60/40 portfolio this year have taken a bath as stocks and bonds have tumbled

By Allison Morrow, CNN Business

The machines are officially winning.

Investors who’ve relied on a standard 60/40 portfolio this year have taken a bath as stocks and bonds have tumbled. Crypto traders aren’t faring well, either. Even gold, the go-to safe haven in volatile times, is underperforming.

But for a small subset of specialized hedge funds known as quants, the chaos of 2022 has unleashed a windfall.

While the S&P 500 is down more than 13% this year, quant hedge funds — which rely on complex mathematical models to make investing decisions — are up more than 15%, according to HFR, a hedge fund research group.

“Macro hedge funds experienced a historic quarter,” says Kenneth J. Heinz, HFR’s president. “Since the beginning of the year, macro strategies — in particular macro strategies that are quantitative, trend-following or commodity-oriented — have produced extremely strong performance.”

That may seem odd to casual market observers. After all, the hedge funds making headlines lately are most notable for their losses. Melvin Capital, once one of Wall Street’s most successful hedge funds, announced earlier this month that it is shutting down. New York-based Tiger Global has reportedly lost $17 billion in this year’s tech selloff.

“If you owned growth stocks this year — like we did at Altimeter — you got your face ripped off,” tweeted Brad Gerstner, CEO of tech-focused Altimeter Capital, earlier this month.

But quants are unique sub-species of hedge fund. Essentially, their highly secretive mathematical models are taking in the price of liquid assets, mostly futures contracts, and forecasting based on trends which way the market is likely to swing.

There’s no emotional, fallible human at the wheel the way there would be with most other managed funds.

Quants are “by definition unemotional,” Heinz tells me. These funds make up just 17% of the industry, but institutional investors are increasingly taking note.

In the first quarter of this year, institutional investors allocated the largest amount of new capital to hedge funds since 2015, according to HFR. Quants are leading the industry through “extreme volatility” — inflation at four-decade highs, tightening monetary policy, and the Russian invasion of Ukraine, including surging commodity prices.

So, why doesn’t everyone just follow the quant strategy?

This upswing for computer-driven funds is relatively new, and has come as a result of a breakdown of historical correlation between equities and bonds. But Heinz says he expects to see more money investors allocating capital with macro-focused funds. Strong performance attracts capital, and “we’ve obviously seen a good example of the type performance that institutions are interested in,” he says.

Europe blocks Russian oil

European Union leaders agreed to ban virtually all oil imports from Russia by the end of this year, a historic deal to try to choke Moscow’s revenue as it continues its assault on Ukraine.

“This immediately covers more than 2/3 of oil imports from Russia, cutting a huge source of financing for its war machine,” European Council chief Charles Michel tweeted Monday evening.

It’s a massive accomplishment, to be sure, my colleague Luke McGee writes. Getting 27 countries to agree on a package that will almost certainly damage their own economies on the behalf of Ukraine, a country that isn’t even in the EU, was unthinkable even a few months ago.

The deal, however, isn’t flawless. The ban contains an exemption for oil delivered from Russia via pipelines, accounting for a third of Russian imports to Europe.

“It’s a fair compromise … this was the best we could get,” Estonian Prime Minister Kaja Kallas said, according to Reuters.

Commission President Ursula von der Leyen said that the pipeline issue would be discussed again, but she didn’t offer a timeframe.

Futures for Brent crude rose 1.8% to $119 a barrel on Tuesday.

Meanwhile, Russia is having little trouble finding buyers in Asia. As my CNN Business colleague Diksha Madhok writes, India’s appetite for cheap Russian oil is only growing, and Russian crude flows to that country this month are roughly nine times higher than the 2021 monthly average.

Summer travel headaches

The start of the summer travel season has kicked off with a lot of frustration. Don’t expect it to get better soon.

Around 6,000 global flights were canceled between Friday and Monday, with hundreds more delayed, according to flight tracking website FlightAware. Some 1,640 flights were canceled on Sunday alone.

Delta Air Lines, which had the most cancellations among American carriers this weekend, blamed Saturday’s disruptions on bad weather and “air traffic control actions” that took place on Friday, saying it is trying to preemptively cancel flights at least 24 hours in advance.

“More than any time in our history, the various factors currently impacting our operation — weather and air traffic control, vendor staffing, increased Covid case rates contributing to higher-than-planned unscheduled absences in some work groups — are resulting in an operation that isn’t consistently up to the standards Delta has set for the industry in recent years,” a spokesperson for the airline wrote.

Big picture: We’re entering our third Covid summer, but the hangover of 2020 is still with us. Demand is soaring, but airlines are struggling to staff up. Pilots are in especially short supply after the pandemic prompted many to retire and slowed training and recruitment.

Passenger traffic at US airports is approaching pre-pandemic levels, but staffing on the ground hasn’t rebounded at the same clip. That means that when summer storms hit, as they did over Memorial Day weekend, there’s little slack in the system to cope with cancellations and delays.

All of that, combined with higher jet fuel prices, are leaving passengers with sticker shock and an understandable outrage over having their travel plans torpedoed. But with no quick fix, there’s little consumers can do other than buckle up and pray for good weather. (And, perhaps, consider a road trip as a back-up plan.)

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