Analysis & Opinion

BOSTON (Reuters) — When Mark Carhart meets with the world’s largest pension funds and endowments he brings along an appealing proposition: His new hedge fund makes money during a crisis.

To be exact, Kepos Capital’s computer driven trading models have earned returns of more than 5 percent this year as Europe’s worsening debt crisis washed away gains elsewhere, leaving investors increasingly uneasy over where to put their money.

The last year has been great for our approach, said Carhart, who used to co-manage Goldman Sachs Group Inc’s once vaunted $10 billion Global Alpha fund and who has been concentrating on macro investing, including currencies, at his own firm since late 2010.

There has been a lot of panic and a lot of herding and systematic strategies are always looking for ways to determine when sentiment becomes excessive, Carhart, 46, said in his first media interview about his new firm since launching Kepos.

He declined to discuss performance or other details about the fund and its investors, citing private placement restrictions.

SETTING OFF ON HIS OWN

After running Goldman’s quantitative investment business for nearly a decade when the Global Alpha fund rose an average 12 percent every year, Carhart attracted lots of attention when he struck out on his own.

But the money did not flood in, making for a tough start as Carhart and his team of 30 people — including former Goldman colleagues Bob Litterman and Giorgio Di Santis — built a track record and crisscrossed the country to woo investors.

Now with some $500 million is assets, a 13 percent return since inception, several prominent clients and a just-earned award from Institutional Investor as emerging hedge fund of the year, Kepos could be on track to raise a lot more, industry analysts said.

Through May, the Hennessee Group shows the average hedge fund gained only 2.15 percent, while the Newedge Macro Trading Index grew only 0.74 percent.

Working in Kepos’ favor may be a revived taste for quant funds after investors long shunned their so-called black box models and complained that quant managers were overly protective about information.

We are speaking with a number of huge institutional investors who are very excited about this area and there is definitely an appetite for these kinds of funds, said Rishi Narang, whose firm, T2AM, invests in quant funds.

Quant funds make up only about 10 percent of the $2 trillion hedge fund industry’s total assets, but a handful of quant funds such as Renaissance Technologies, D.E. Shaw and AQR have been hugely successful. Indeed, D.E. Shaw, before it became enormous, and Two Sigma are two of the firms whose work Carhart admires and models himself after.

GAINS FROM CRISIS

The increasing hand wringing sparked by Europe’s debt crisis in 2012 could be a blessing for Kepos. The crisis offers plenty of chances for the firm’s PhD’s — about one of third of the 30 employees including Carhart have one — to research which country might leave the eurozone and whose credit is most at risk.

In the firm’s plainly furnished offices on New York’s west side, across from the city’s biggest bus station, the markets’ frenzy barely make a stir as analysts and traders stare at their screens and go over their models again and again in virtual silence. Apart from the computers and systems, the most high tech objects there may be the bicycles Carhart and colleagues pedal to work and store in a spare room.

But even as Carhart presides over strong returns, the so-called quant quake of 2007, when the Global Alpha fund and many others stumbled badly, is never far from his mind. He is doing things differently now, explaining to investors how that disaster — when many models looked too similar and misread the markets — will not be repeated.

Kepos’ models can adapt more quickly and the fund, with only a fraction of the money that Global Alpha managed, is more agile than Goldman Sachs was.

Investors familiar with the fund said the average holding period is about a week.

Still, Carhart faces stiff competition for investors. Firms such as Cambridge, England-based Cantab Capital Partners — headed fellow Goldman alumnus Ewan Kirk — and Charlottesville, Virginia-based Quantitative Investment Management are also posting solid numbers and attracting attention, industry analysts said.

But even as the firm is feted by the industry as a prominent newcomer, Carhart stays focused on his goals. More assets are welcome, but the firm is not like anything else, he says.

We are quiet, modest and under the radar, and we want to stay that way.