Hedge fund PanAgora shuns corporate propaganda

Quantitative funds need more than just statistical input, but not necessarily from the companies they invest in, argues Eric Sorenson, president and chief executive of PanAgora Asset Management.

The Massachusetts-based hedge fund runs $17 billion across a number of strategies, the principal two being bottom-up global equity (via its Dynamic Global Equity Fund) and global macro (the Global Tactical Asset Allocation Fund). 

PanAgora recently listed a fund vehicle in Australia that brought in A$500 million of institutional money from superannuation funds. The firm -- whose name is ancient Greek for 'universal marketplace' -- is 10 years old and its assets under management peaked in 2007 at $25 billion.

"PanAgora is a quant fund, but it is not a black box surrounded by nerds with no subjectivity. That's all hooey," says Sorenson, who used to work in the finance department of the University of Arizona, then at Salomon Brothers. "If you can forecast earnings, you can make money, but we don't do that by going and visiting a CEO.

"You still have to have a subjective element, because quant models alone can be backward-looking and look to extract linear relationships in a world which is not linear."

The reason PanAgora doesn't see a lot of point visiting CEOs is that when deciding whether to invest, they don't want to buy into -- or even listen to -- the latest positively spun corporate propaganda.

"The reason why we own a company's stock is for the same reason as Warren Buffett does. Our system finds us the answer and monitors it," he says. "This fund has 50-60% turnover, not thousands of percent per month like a stat arb [statistical arbitrage] fund."

Sorenson was in Hong Kong last week to deliver a keynote speech at a quant-investing conference run by Macquarie and to talk to investors. Sorenson says investors feel there will be opportunities in North America and China in the next couple of years, and want the PanAgora system to position itself with that in mind.

The databases the firm has built range from biotech and pharmaceuticals companies through to banks, and are overseen by a cabal of PhDs, academics and economists. The data and ratios found in its database do mutate, by an estimated 15% per year, as it factors in new perceptions.

For example, when appraising the US financial institutions sector, the team put some new ingredients into the model, including metrics found within the data deposited at the US Federal Deposit Insurance Corporation that profiles overdue loans. They then use this data to rank the banks, together with movements in options and credit default swap pricing. Their models also look at news events and gauge how prices react thereafter.

The PanAgora funds benchmark against indices such as the MSCI range, and the firm aims to outperform that benchmark by 3% to 4% on its flagship product, although it operates a large number of managed accounts in which the risk on the strategy can be boosted or cut to yield a different return profile.

For this, investors have to pay a surprisingly cheap institutional-level fee of around 15 basis points for management and 1% for performance for the long/short product. PanAgora has a distribution partner in Japan and a salesman in Hong Kong, Jesse Huang.