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Chart of the month: From Pod-Shop to Quant-Shop – The new El Dorado?
From Pod-Shop to Quant-Shop – The new El Dorado?
Source: NS Partners, Bloomberg
Most of our readers will be familiar with the numerous pieces we have written over the last five years on the pod-shop model which have made both investors and investment managers very happy over the last two decades, with their performance culminating in 2024, one of the best years in recent history besides 2020 (read our piece back in January of this year: Peak Pod Shop – Where to Next?). Fast forward to today and performance in 2025 so far has proved to be challenging for most of them given the current risk-free rate. The Good, the Bad and the Ugly side of the pod-shop model has been increasingly highlighted by the press in recent months and pension funds amongst others are starting to shy away from this model as most still focus on total expense ratios (despite the superior risk adjusted returns of the past). Egregious fees (via the infamous passthrough model), poaching games on star traders (via creative enticement programs), the higher cost of leverage, significant market share of the overall hedge fund industry (and even more so in terms of global market footprint and impact when you include their leverage) and correlation between them are some of the common criticisms. YTD it is fair to say that most pod shops have disappointed investors (particularly in the market neutral US equity long / short space) in a market that has witnessed lots of turmoil during the first quarter and have barely recovered since then. Add to that the reluctance in applying a risk-free rate hurdle to performance fees charged and you will have a backlash on pod-shops that don’t deliver. The subsequent problem with that is where does one redeploy such large amounts of money despite the quarterly investor level gates that are increasingly being raised as assets balloon.
Since the “Quant Winter” between 2018 and 2020, quant funds have been performing with consistency, which has not gone unnoticed. As a result, they have been very successful in significantly raising assets this year, propelling some of the largest quant shops to the top of the Global Billion Dollar Club. They offer lower expense ratios (unlike the high passthrough structures for hiring talented traders), better liquidity (with no investor level gate for the most part), AND the client does not take the netting risk. From fundamental, technical, flow and sentiment driven signals, quant funds come in different garden varieties, and they all work until they don’t, and you never know when or why until after the event. One must not forget August 2007, which was a memorable moment for quant funds where the last one standing in the game of musical chairs was the winner-take-all! We did witness somewhat of a repeat this July, although with less drama (mostly due to short squeezes and factor rotations) but overall, they have demonstrated consistency in outperforming traditional pod shops.
Quantitative strategies take out the emotional factor in investment decisions (more rational and consistent decision making) however there are certain instances where quant shops can get blindsided by unpredictable events. “Liberation Day” was the latest example where many were caught off guard. Quant shops typically do not fare well during macro or geopolitical events. Sentiment is also another important factor to which many have had to adopt. Over the last five years quant shops have been increasing the use of AI and LLMs at an exponential rate and now seeking new ways in achieving machine “superintelligence”. Add to that the increasing availability of a plethora of new data sets and you have models that have become increasingly sophisticated and hard to compete with. The main drawback remains the fact that these models cannot plan for unexpected events or reasons like human beings. Perhaps the combination of quant strategies with a discretionary overlay or vice versa is the optimal solution going forward. DE Shaw, one of the oldest quant shops, just launched its first new multi-strategy fund in 15 years which will be running discretionary strategies instead of the algorithms they are historically known for. This trend is likely to continue.
With the average holding period for US stocks having declined significantly from over 5 years back in the 1970s to less than a few months today, this trend has somewhat been amplified by the pod-shops given the strict drawdown limits imposed on their PMs who typically trade over a quarter trying the anticipate the next earnings miss or beat. Quant shops have an even shorter time horizon ranging from nanoseconds (in the case of co-location) to 20 days or more and have thus further increased this trend. Gone are the traditional hedge funds that buy and hold over a long-time horizon whilst stomaching short term volatility. Perhaps this is one of the reasons why the daily trading volumes on the NYSE have consistently been beating records which have been approaching 5 trillion shares in a single day! Fair to say that today what you see on publicly available data is only the tip of the iceberg as most of the very large (and levered pod/quant shops) have their own internal liquidity provision whereby up to a third of their trades are matched internally therefore avoiding transaction costs and thus don’t appear in the official data. At the end of the day, it is a balance sheet exercise where both pod shop and quant shops manage thousands of underlying positions with a lot of leverage centered around a select number of prime brokers if not one (to offset trades internally when they can).
Whilst it is hard to gauge the total market share of the global hedge fund industry represented by pod shops and quant funds today (from the 25-30% of total AUM in 2024), one thing for sure is that given the leverage involved, the risk of getting run over remains very high given the recent growth in the quant space.
Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request.
© NS Partners Group
Mahjong China Fund awarded Best Performing China Fund of Funds 2024 by The Hedge Fund Journal
We are delighted to announce that NS Partners’ Mahjong China Fund has been recognised by The Hedge Fund Journal at its Performance Awards 2025, winning the category “Best Performing Fund in 2024 – China Fund of Funds”.
This prestigious award highlights the Fund’s strong performance and consistent risk management in what remains a challenging and highly dispersed market environment.
A testament to our long-standing expertise in Asia
Led by Senior Portfolio Manager Gabriele Casati, our team combines extensive on-the-ground knowledge with a rigorous investment process to navigate Asia’s evolving opportunities.
At NS Partners, we have been investing in Asia and China for over four decades. This award underlines the strength of our network, our rigorous manager selection process and our commitment to delivering risk-adjusted returns for our clients.
We would like to thank our investment partners and clients for their continued trust.
Learn more
For more information about the MAHJONG CHINA FUND, including the prospectus and legal documentation, please contact your NS Partners representative at IR@NSPGROUP.COM.
Marketing communication. For professional/qualified investors only. Past performance is not a reliable indicator of future results.
Mahjong China Fund: Business Lunch in Lugano, 2 July 2025
Mahjong China Fund: Navigating China’s New Landscape
Business Lunch – Grand Café Al Porto, Lugano – 2 July 2025
Earlier this week, we hosted a private lunch presentation at the historic Grand Café Al Porto in Lugano, bringing together professional investors to explore China’s evolving macro environment and discuss how we position to capture opportunities through our Mahjong China Fund.
Key takeaways from our recent trip to Asia
Following more than 30 meetings in Hong Kong with leading hedge fund managers focused on China and the broader region, we came back with a few clear insights:
- Shifting focus to domestic drivers: Managers are increasingly tilting portfolios from export-led themes to domestically driven opportunities across consumption, technology, and industrials.
- AI and tech acceleration: Accelerated AI adoption in China, underpinned by both government initiatives and private sector investments, is a top area of conviction.
- Selective property exposure: While the property sector is still digesting structural adjustments, selective managers are positioning for a recovery in tier-1 cities.
- Active hedging & volatility management: Increased use of derivatives to navigate tech concentration risks and market volatility.
- Capital flows turning positive: Local investors, corporate buybacks and a gradual return of international flows are stabilizing markets.
- Valuations remain compelling: Many high-quality Chinese companies continue to trade at significant discounts versus global peers, offering a fertile hunting ground for active managers.
Why Mahjong China Fund now?
In this complex backdrop, we believe the Mahjong China Fund provides a highly differentiated way to access China’s equity markets. Unlike traditional long-only or passive vehicles, our approach leverages local long/short managers with deep on-the-ground expertise, capable of navigating dispersion and managing downside risks.
Since its inception on 31 March 2021, the Fund has delivered a cumulative return of +8.5%, significantly outperforming the MSCI China Index (-32.2%), with less than one-third of the volatility.
Our concentrated portfolio of 10-15 managers blends variable net, low net, and long-biased strategies — aiming to capture approximately two-thirds of the upside with only one-third of the downside.
This makes the Fund an attractive diversifier within a global equity or emerging markets allocation, especially for investors seeking controlled volatility and strong risk-adjusted returns.
Learn more
For more information about the Fund, including the prospectus and legal documentation, please reach out to our NS Partners representative or visit our website at preprod-nsp.notzstucki.website/.
Marketing communication. For professional/qualified investors only. Past performance is not indicative of future results.
Mahjong China Fund: Business Lunch in Lugano, 2 July 2025
Mahjong China Fund: Navigating China’s New Landscape
Business Lunch – Grand Café Al Porto, Lugano – 2 July 2025
Earlier this week, we hosted a private lunch presentation at the historic Grand Café Al Porto in Lugano, bringing together professional investors to explore China’s evolving macro environment and discuss how we position to capture opportunities through our Mahjong China Fund.
Key takeaways from our recent trip to Asia
Following more than 30 meetings in Hong Kong with leading hedge fund managers focused on China and the broader region, we came back with a few clear insights:
- Shifting focus to domestic drivers: Managers are increasingly tilting portfolios from export-led themes to domestically driven opportunities across consumption, technology, and industrials.
- AI and tech acceleration: Accelerated AI adoption in China, underpinned by both government initiatives and private sector investments, is a top area of conviction.
- Selective property exposure: While the property sector is still digesting structural adjustments, selective managers are positioning for a recovery in tier-1 cities.
- Active hedging & volatility management: Increased use of derivatives to navigate tech concentration risks and market volatility.
- Capital flows turning positive: Local investors, corporate buybacks and a gradual return of international flows are stabilizing markets.
- Valuations remain compelling: Many high-quality Chinese companies continue to trade at significant discounts versus global peers, offering a fertile hunting ground for active managers.
Why Mahjong China Fund now?
In this complex backdrop, we believe the Mahjong China Fund provides a highly differentiated way to access China’s equity markets. Unlike traditional long-only or passive vehicles, our approach leverages local long/short managers with deep on-the-ground expertise, capable of navigating dispersion and managing downside risks.
Since its inception on 31 March 2021, the Fund has delivered a cumulative return of +8.5%, significantly outperforming the MSCI China Index (-32.2%), with less than one-third of the volatility.
Our concentrated portfolio of 10-15 managers blends variable net, low net, and long-biased strategies — aiming to capture approximately two-thirds of the upside with only one-third of the downside.
This makes the Fund an attractive diversifier within a global equity or emerging markets allocation, especially for investors seeking controlled volatility and strong risk-adjusted returns.
Learn more
For more information about the Fund, including the prospectus and legal documentation, please reach out to our NS Partners representative or visit our website at preprod-nsp.notzstucki.website/.
Marketing communication. For professional/qualified investors only. Past performance is not indicative of future results.
Last one standing – Reconsider European equity long short funds – NS Insights
European equity long short funds have suffered from Europe’s lack of appeal. But now might be the time to reconsider them.
At the beginning of the 2000s, most private banks and asset management firms based in Geneva managed their own funds of funds that invested in a new generation of young alternative managers specialising in European equity long/short strategies. At the time, these multi-manager funds delivered double-digit annualised returns, net of management and performance fees. After starting their careers as equity managers within large traditional investment companies, most of these talents left in the 1990s to establish their own independent asset management firms. Many of them were backed by alternative investment legends such as George Soros and Michael Steinhardt, to run portfolios of long/short equity ideas in Europe, a strategy that had already proven its worth in the United States since the 1950s.
An endangered species?
Today, all European funds of funds specialising in long/short equity have disappeared, with one exception. The main reason: the 2008 global financial crisis wiped out many hedge funds in Europe, partly because they offered more attractive liquidity terms than their American counterparts. Added to this, the US equity market has significantly outperformed Europe since 2009 (thanks to the tech sector), following a similar trend from 1989 to 2009, which further reduced the appeal of European equities. Moreover, Europe has been weakened by geopolitical challenges, making it even less attractive to international investors.
Investors have short memories
Yet it is well known that every crisis also presents significant opportunities for long/short managers. Many have already forgotten the Greek debt crisis at the end of 2009 and, more importantly, the country’s remarkable recovery after the 2018 bailout! This year, Greece ranks among the best-performing equity markets in the world, alongside other so-called peripheral markets like Poland, the Czech Republic, Spain and Italy, while Switzerland has lagged, moving similarly to France since the start of the year.
Make Europe Great Again
Published at the end of 2024, the Draghi report provided European leaders with a roadmap to “make Europe great again” by boosting investment and productivity. The report highlighted the need to invest EUR900 billion annually (around 4.5% of EU GDP) to address the continent’s structural competitiveness gap. This year, Germany announced a EUR500 billion plan over ten years to modernize its infrastructure. More recently, Blackstone unveiled plans to invest USD500 billion in Europe over the next decade. And this is just the tip of the iceberg, with many other initiatives underway across the continent to strengthen its competitiveness.
Europe is home to some of the world’s best companies
While Europe certainly has its share of struggling companies, it is also home to some of the most successful firms globally in luxury, pharmaceuticals, chemicals, energy, defense, and aerospace, all ideal playing fields for long/short strategies. Despite this, the universe of European long/short managers has been shrinking every year since the 2008 financial crisis, due to a lack of interest or liquidity compared to the US. Nevertheless, on a regional basis, managers focused on Europe have been among the top performers since the start of the year.
High potential but hard to access
History shows that the US has long produced some of the best long/short managers. However, over the past five years, some of the brightest talents in this space are found in Europe. They have managed to generate positive alpha on both their long and short positions, while skillfully adjusting their net exposure, an advantage often linked to the smaller size of their funds. Still, the capacity of these strategies remains limited due to low scalability tied to liquidity, restricting access to these opportunities. The best way to tap this potential is to invest in a collective vehicle specialising in Europe, with strong expertise in selecting and monitoring the top European managers. However, access to these funds often remains limited to a select circle, as they are frequently closed to new investors.
Notably, the GRANOLAS (Europe’s equivalent of America’s “Magnificent Seven”) have started to underperform the Stoxx 600 since early April, creating greater dispersion and a more favorable environment for selecting long and short positions. With Europe once again facing geopolitical tensions and the persistent risk of deglobalisation, it might just be time to reconsider European long/short strategies.
China’s growth 2025: The dragon awakens
Hedge funds are betting on AI, tech and local consumption to tap into China’s renewed growth.
A renewed sense of optimism among fund managers
Is 2025 finally the turning point for Chinese markets? After several years of painful adjustments, positive signals are starting to align. In Hong Kong, hedge fund managers are becoming increasingly constructive. During a recent trip to Asia, we met with over thirty managers focused on Chinese markets and they all shared a similar view: both top-down and bottom-up conditions are improving.
Strong earnings rebound in Chinese companies
What’s driving this shift? A clear policy pivot from Beijing in September 2024 marked the start of stronger support for the economy and markets. The result: a robust earnings rebound in Q1 2025. BYD reported a 98% increase in EPS, SMIC posted +162% growth in net income and Xiaomi +64%. In a market where corporate earnings serve as a proxy for the macro picture, these numbers speak volumes.
Domestic consumption remains a key challenge
The key domestic driver remains consumption, still below its pre-COVID potential. The government is trying to boost demand with widespread discounts, reaching up to 20% on certain goods. Yet, with employment still under pressure, a sustained rebound in consumption will be hard to achieve without a recovery in the job market.
Real estate: confidence returns, slowly
The real estate sector, long the epicenter of the crisis, appears to have bottomed out. In cities like Shanghai, some new developments are seeing price increases of up to 10%. Some funds are taking this opportunity to re-enter the space via property management companies, seen as more resilient and better positioned to benefit from China’s new housing quality standards.
Sector rotation toward the domestic market
In response to this changing landscape, portfolios are shifting. The dominant trend is clear: a gradual exit from export-driven names and a renewed focus on domestic demand beneficiaries. Consumption, technology (particularly TMT), industrials and AI are leading this sector rotation.
AI in China: ambition, capital, and sovereignty
China’s technological acceleration is striking. AI has become a strategic national priority. Alibaba announced a USD 53 billion investment in AI and cloud and Tencent is following a similar path. The push for tech sovereignty is also visible in the semiconductor sector, where managers are identifying opportunities across the value chain, from chipmakers to materials and equipment providers.
Tech and EVs at the forefront
Digital giants like JD.com, Pinduoduo and Meituan remain core holdings, benefiting from China’s market depth, rapid digitalization and the government’s renewed support for private platforms. The EV sector, driven by players like BYD, NIO and Xiaomi, is thriving at the intersection of China’s climate goals and rising consumer appetite for premium products.
Hedge Funds adapting to volatility
Lastly, Hong Kong-based hedge funds are increasingly using derivatives to manage exposure and volatility. After diversifying into other Asian markets and the US, many are now reallocating substantially back into China. The underlying belief: despite ongoing uncertainties, China’s fundamentals are once again turning attractive.
Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of the date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instruments referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the Finma cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group
AI is transforming systematic quant investing
AI Is Transforming Systematic Quant Investing
Its impact is profound across all fronts: markets, operations, talent requirements and the financial ecosystem.
As artificial intelligence evolves from a mere auxiliary tool to a central decision-making component, the landscape of systematic quantitative hedge funds finds itself at a critical crossroads. This transformation carries far-reaching implications, not only for market dynamics and fund operations but also for talent requirements and the broader financial ecosystem.
Will more efficient markets eliminate alpha?
As AI becomes ubiquitous within quant funds, markets are likely to grow increasingly efficient, reducing the number of pricing anomalies that hedge funds traditionally exploit. These systems are capable of processing vast volumes of data and identifying subtle patterns at unprecedented speed, thereby quickly arbitraging inefficiencies that once produced alpha. The more funds deploy similar AI methodologies analyzing the same data sets, the faster such opportunities will vanish. The result? A scenario where thousands of ultra-powerful computers compete over ever-diminishing slivers of profit.
This accelerated erosion of alpha is fueling a technological arms race, where competitive advantage increasingly hinges on either superior AI capabilities or access to exclusive data sources. Funds lacking cutting-edge AI infrastructure will find themselves at a significant disadvantage, potentially triggering consolidation in the industry as smaller players struggle to maintain performance.
A systemic risk: homogenization
However, the widespread adoption of AI in quantitative funds also introduces new forms of systemic risk. When many funds rely on similar algorithms trained on overlapping data sets, they may respond in the same way to market events, thereby amplifying price movements and potentially triggering flash crashes or liquidity crises. This herd-like algorithmic behavior could increase correlation between ostensibly diverse strategies, undermining the portfolio diversification sought by institutional investors. Are we on the verge of automating financial crises with surgical precision?
Unlike human decision-making, which naturally varies, AI systems could converge on optimal solutions, creating dangerous uniformity in market positioning. This homogenization represents a novel form of systemic vulnerability that regulators and risk managers are only beginning to understand.
Wanted: new talent profiles
The rise of AI in quant funds is redefining talent requirements. Traditional quantitative profiles, mathematicians and physicists with financial acumen, must now be complemented or replaced by AI specialists, machine learning engineers and data scientists. This shift presents both opportunities and challenges for the industry’s workforce.
Furthermore, hedge funds will increasingly compete with tech firms for top AI talent, likely pushing compensation even higher for individuals with both machine learning expertise and a solid grasp of financial markets. Simultaneously, certain traditional quant roles may become obsolete as AI systems take over modeling and strategy development tasks previously handled by humans.
Data as a competitive edge
In an AI-dominated environment, proprietary data will become an increasingly valuable asset. Funds will invest heavily in unique data sources: alternative data, private information or novel combinations of existing datasets that provide a competitive edge. This emphasis on data exclusivity may lead to acquisitions of data providers and investments in proprietary data collection infrastructure. What were once mere commodities (data) are transforming into scarce resources.
Looking ahead, successful funds will be those that excel not only in data acquisition but also in preprocessing, feature engineering and quality assurance, producing clean, structured inputs that maximize AI performance. The ability to turn raw data into machine-learning-ready formats will be a critical source of competitive advantage.
Major regulatory challenges ahead
In a hedge fund landscape increasingly shaped by AI, regulators will face significant challenges. Traditional risk management and disclosure frameworks may prove inadequate for supervising complex, adaptive AI systems whose decision logic continuously evolves. Issues such as algorithmic transparency, explainability and fairness will become increasingly important regulatory concerns.
Moreover, as AI systems become more sophisticated, pinpointing responsibility for market disruptions becomes more difficult. Was a flash crash the result of a coding error, faulty data or emergent AI behavior? These questions will greatly complicate regulatory oversight and accountability.
More than a technological shift, a structural overhaul
The rise of AI in systematic quant investing is not merely a technological upgrade, it represents a fundamental restructuring of financial markets. While it may enhance efficiency and unlock new sources of alpha, it simultaneously introduces novel risks and challenges. Funds, investors and regulators must rapidly adapt to this new paradigm, where competitive advantage is increasingly derived from AI capabilities, data exclusivity and the human expertise needed to operationalize both effectively.
In the meantime, one must ask: should we celebrate the fact that humanity is entrusting its financial system to algorithms that even their creators do not fully understand?
Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of the date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instruments referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the Finma cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group