Melbourne-based Spatium Capital operates its small-caps fund on a quant basis. The fund manager thinks the case for more quant strategies in small caps is compelling and already in place in US and European investing.
Why does this work in generating alpha?
“Inherently, quant does not ‘think like the crowd’, thereby when calibrated to the right opportunity set, quant strategies can derive alpha with greater consistency than those applying non-quant strategies.
“Quant strategies can often include varying thematics: mean reversion, momentum, high-frequency exploitation, yield farming, systematic, statistical arbitrage, factor investing, volatility coefficients, macro-timing, repeatability etc.
“Our quant strategy overlays the tenets of small-cap inefficiency, momentum, systematic, volatility coefficients and mean regression,” said Jesse Moors, Director & Co-Portfolio Manager, Spatium Capital.
However, Spatium Capital does not identify as a hedge fund, preferring a conservative and relative-value approach, avoiding any complex or risky assets (i.e. options, derivatives, structured products etc.). Quant applied on a long-only basis has the opportunity to offer more consistent alpha, but also with less downside risk, less variance and less beta.
“For us, mean reversion is a prominent tenet of the quant strategy. Mean reversion in finance represents a tendency for prices or values to return to a historical average or equilibrium point (the mean).
“Just as planets in their orbits are in a balanced state due to the opposing forces of gravity and momentum keeping them in an equilibrium point, mean reversion in finance asserts that whilst some prices may deviate from their averages, factors of supply and demand, investor behaviour, passive products (ETFs) or others, will in most instances over time, pull their prices back toward the mean,” said Nick Quinn, Director & Co-Portfolio Manager, Spatium Capital.
As evidence of this Fund discipline, it systematically rebalances frequently.
Spatium Small Companies Fund¹ (SSCF) has an average full rotation of the portfolio every 30 to 45 days using mean reversion principles (alongside the other aforementioned tenets).
In short, Spatium Capital remains exposed to positions that have temporarily diverted from their mean and are due to return to their equilibrium point.
Singapore learnings
Jesse Moors commented on their recent Singapore visit:
“We found the response to an Australian manager using quant quite reassuring.
The following points encapsulate the views we heard:
- Repeatable and systematic are the biggest trends for wealth in Singapore – defensive quant styles that pursue alpha with less beta, less variance and less volatility are top of the agenda for single and multi-family offices.
- SFOs and MFOs will do their own research to expedite decision-making as the opportunity for quant strategies is still scarce.”
Spatium Small Companies Fund performance (to 31 Aug 2023)
- The SSCF has returned +55.7% alpha since inception (1 July 2018)
- Achieved through 7,309 individual trades and over $408mn traded
- Or more recently, the SSCF achieved +16.9% alpha for FY202
- Achieved through 1,822 individual trades and over $114mn traded
Recent media releases:
• Singaporean Wealth manager invests in the Spatium Small Companies Fund
• iShares S&P/ASX Small Ordinaries ETF vs Spatium Small Companies Fund
1. The Spatium Small Companies Fund is available to Australian Wholesale Clients as defined in the Corporations Act (Cth) and to Singaporean Accredited Investors or certain other persons prescribed under Section 305 of the Securities and Futures Act (Singapore).
MEDIA CONTACTS
Nicholas Quinn
Spatium Capital
Director & Co–Portfolio Manager
0437 175 038
nicholas.quinn@spatiumcapital.com
https://www.linkedin.com/in/nicholasquinn-spatiumcapital/
Jesse Moors
Spatium Capital
Director & Co–Portfolio Manager
0422 040 119
jesse.moors@spatiumcapital.com
https://linkedin.com/in/jessemoors
SQM awarded Spatium Capital an Approved rating for its Small Cap Fund in 2022 and is currently reviewing the Fund for its annual review.
SQM’s Fund description of Spatium Capital:
The Spatium Capital Small Companies Fund (the “Fund”) is an actively traded portfolio of approximately 25-to-40 listed companies, turning over each position in the portfolio, on average, every 30-to-45 days.
The Fund seeks to identify and capitalise on mispriced and short-term equity price dislocations.
The trading strategy uses a quantitative model developed by the Directors over the past 10+ years. In terms of the commonly known factors: momentum, small capitalisation, and mean reversion are considered elements of the strategy. No fundamental research or sector views are taken.
SQM Research considers this strategy will have a low correlation with many other small-cap Funds over the long term.