State Street Global Advisors (SSgA) is boosting staff levels at its investment research unit, the Advanced Research Centre (ARC), as the demand for quantitatively driven strategies and products surges.

Total staff in the unit, who comprise mainly former academics and analysts, has risen from 20 to 27 in the past year, with plans to go to 35 in the next year. They are spread between head office in Boston, the London and Montreal offices and four in Sydney. Mark Hooker, ARC’s managing director, said during a visit to Australia last week, that increased demand for long/short and other more sophisticated strategies meant there was a “strong excess demand” for quant research. However, he added: “Even if all we could do was long-only with no leverage, quant strategies would still be popular. In the 1980s there really wasn’t the data available to support as much research. Then there came a period of more acceptance. But the tech boom of the 1990s didn’t play to the strengths of the quants. Since then markets have been more conducive.” Quant models are considered to have more “power” than traditional fundamental research on the short side of investing because of the greater coverage of the market available and the different mindset from fundamental analysts searching for good buys. They are also required for global macro and broad arbitrage funds because of the vast array of computations necessary in managing such funds. Quants are firm believers in the greater efficiency of portfolios which provide broad market coverage, rather than the “best ideas” approach of some fundamental strategies. “Breadth is important and when you give it up you shouldn’t do it lightly,” Hooker said. ARC is a unique unit which has its main aim as improving the efficiency of SSgA’s in-house strategies. However, it is also involved in product development and occasionally works on client-specific projects in much as the same way as an asset consulting firm. “There’s no pressure (on ARC) to produce revenue,” Hooker said. “We have in the past worked with clients on a revenue basis but I don’t think that’s the right business model. There’s no pressure to do it differently.” What Hooker has done though since taking over the role early last year is to restructure ARC so that the researchers work more closely with portfolio managers in some cases. For example, there are currently three working on active US equities with portfolio managers which will continue for a year or more. Apart from its own research, some of which is published and disseminated back to the academic community, ARC analyses the work of academics and others for anomalies in the efficiency of markets for new sources to be built into the SSgA models. “We may see that, here, there’s a risk factor that needs to be priced, and ask whether it’s something we should put into a portfolio.” ARC also sponsors research. It is a major sponsor of the Laboratory for Financial Engineering at Massachusetts Institute of Technology and also, intriguingly, the genetic program for artificial intelligence at the University of Michigan. Hooker said that the firm has used some of the genetic-type research in some of its sector bets. Before joining ARC in 2000, Hooker was an economist with the Federal Reserve in Washington, which had a similar culture to that of ARC in that the research was indepth and the 300-odd economists were not pressured to do anything “quick and dirty”.

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