Investors have already begun to axe active quant managers hurt by the credit crisis and are putting the brakes on searches for quantitative strategies, consultants say. “There is no search activity,” said Daniel Celeghin, director at Casey, Quirk & Associates. “Flows have completely dried up.”
Investors are showing less patience for both long-only and long/short strategies meant to offer good performance with below median risk but that have, in fact, posted subpar returns. Managers under the microscope include Mellon Capital Management Corp, Barclays Global Investors, State Street Global Advisors and Goldman Sachs Group.
Strategies under fire include hedge funds, global tactical asset allocation and various long-only strategies. Howard Yata, managing director at consulting firm Wilshire Associates, said several of his 25 institutional clients have pulled money from quant managers of various strategies. The number jumps to about 40 per cent if he includes investors that have put their managers on watch.
Michael Rosen, chief investment officer at consultant Angeles Investment Advisors, said his clients began yanking money late last year from some long/short quantitative managers and long-only equity managers this year. Quantitative portfolios rely on earning marginal returns, said Rosen. “You’re picking up nickels in the street. If you go through a period of six to 12 months where you lose $100, well, that’s a lot of nickels,” he said.
Quant models rely heavily on historic market behavior and will generally underperform in unusual market conditions like the liquidity crises in 2007. While institutional investors have not given up on quantitative strategies, these managers will have a tough time winning new business for the next few years. “This will hurt managers … for two to three years,” Yata said. Michael Ho, chief investment officer in Mellon’s New York office, said while “quant strategies may not be as popular as they were in 2005-2006,” interest in them won’t fade away.
The firm, which has US$215.8 billion in assets under management, combines fundamental and quantitative analysis in its investment process across strategies, said Ho. Mellon’s strategies are also more transparent than the typical “black box” strategy used by other quants, he said. Mellon officials do not plan to change their investment model in reaction to the unusual market conditions, he added.
Still, the firm’s largest active strategy — Global Alpha, a GTAA portfolio with US$44.7 billion in assets at the end of 2007 — underperformed its custom benchmark by 14.7 percentage points last year. That benchmark is a 40/60 split between the Morgan Stanley Capital International World index and the Citigroup World Government Bond index, respectively.
While Mellon executives are sticking to their knitting, BGI officials have tweaked their investment process after some of its strategies, particularly enhanced indexing, took a hit. In January, Russ Koesterich, head of investment strategies at BGI, said the firm is adding more industry-specific analysis to its stock-picking process.
The BGI’s Alpha Tilts Fund, an S&P 500 enhanced index strategy, returned 0.84 per cent in the year ended December 31, underperforming the S&P 500 index by 4.66 per cent. Despite the recent bumps for quant managers, investors will benefit in the long run from having a mix of quant and fundamental managers in their roster, said William Atwood, executive director of the US$12 billion Illinois State Board of Investment.
“I think the issues of last year are transient, and, more importantly, they’re behind us,” he said.