Quants and Needs

The Algorithm

Quantitative (quant) funds use algorithms to identify stocks to trade. By applying a machine approach to investing, they claim to reduce the human error that clouds our stock-picking judgement.

Firms hire expensive talent including software engineers and mathematicians to flesh out algorithms that can result in billions of dollars in returns.

Well known quant hedge funds include:

• Renaissance Technologies - $106B AUM

• Citadel - $62.3B AUM

• D.E. Shaw - $60B AUM

• Two Sigma - $60B AUM

This article from Hedgeweek highlights the surging popularity in quant investing strategies, with research showing more than 22% of hedge funds employing purely quantitative strategies in 2022…

Quant strategies are so widespread in the hedge fund stratosphere because of the high liquidity level in public markets. Equities, fixed income, commodities, currencies, derivatives, and other common hedge fund asset classes are transparent markets with real time pricing, rich with data to plug into models.

Private markets, on the other hand, have been slower to adopt quantitative investing systems

Termina(tor)

Tribe Capital is a venture capital firm founded in 2018, an offshoot of Chamath Palihapitiya’s Social Capital. As a relatively young fund, Tribe Capital has managed to raise $1.6B in assets under management to invest in cryptocurrency and software companies.

Tribe’s self-acclaimed investing edge comes from its data-driven quantitative approach in Termina, a subscription based AI software program for quantitative intelligence. While a previously internal weapon, Termina is now being spun out and monetized.

Arjun Sethi, a co-founder at Tribe Capital, has crowned Termina as the “true Bloomberg of the private markets”

Some features include:

• A dashboard that aims to help investors quickly gauge the health of any company by comparing it with companies in Termina’s proprietary dataset

• Transactional data on ~1,500 companies that Termina has fed into multiple third party language models

• A large language model designated to improve investors’ benchmarking competence

Critics remain skeptical of Tribe Capital’s true motives of spinning out Termina

If Termina really transforms private market investing capabilities with its quantitative insights, then the rational route would be for Tribe to keep it internal. Also, Termina’s value improves long term as it takes in customer data, which is not ideal for potential customers (VC and PE funds).

Numbers Don’t Lie

Tribe Capital isn’t the only venture fund cooking up internal algorithms for due diligence and deal flow sourcing - Data-Driven VC Landscape 2023 provides a useful market overview on the state of digitization in VC investing models.

The report ranks the top 151 data-driven VC funds based on the number of full time engineers (investor roles don’t count), DDVC community nominations, the number of segments of the VC investment process that have internal tooling, and more.

EQT, ICONIQ Capital, and Earlybird VC took the top three spots, in that order.

The median “data-driven VC” profile is a firm with:

• $540M in AUM, founded in 2012

• 43 employees

• 3 engineers

While venture capital firms are typically lean, a ~7% engineer to total employees ratio confirms the notion that VCs are still newcomers on the quant scene.

Expect more venture funds to adopt internally developed quantitative tools at various stages of the value chain as private markets become increasingly liquid over the next decade plus.

Dive Deeper

• Tribe Capital’s Arjun Sethi is selling Termina subscriptions to private investors. Read more here

• Andre Retterath, author of Data Driven VC, analyzes patterns of successful startups by looking at factors like age, education level, number of executives, and more. Check it out here

• High level Forbes breakdown of quants creeping into VC here

Revisiting the Catalogue

Take a blast to the past with our most popular posts from the last month:

1. Queso Capital Partners

2. GOAT Talk

3. Tee Time