The pool that has been drawn on by quantitative investors over the last five years has some fairly simple common denominators in it, as well as some more nuanced and specific tools. Those common denominators are also drawn on by hedge funds and we’re all aware of the hedge fund explosion. So there’s more of a risk of contagion in that common denominator of quants, and that has probably fairly copped some scrutiny in light of what’s happened over the past two years.
Greg Bright: Looking at the performance numbers for the group of quant managers in Aussie equities (see table) it is interesting that there are only two out of nine which have outperformed the median of all managers and they are both Australian managers: Ankura and AMP Capital. Matthew Ross: Most managers have managed to outperform the benchmark in the past 18 months – the vast majority of active funds have outperformed the benchmark. The quant managers, by and large, have outperformed the benchmark with the exception of maybe two or three.
Greg Vaughan: I think capacity is an important issue. We’ve come up with the broad guideline of half a per cent of market cap (as a maximum size for a fund) which is a common-sense kind of number that floats around. But we have managers that are well in excess of that. There’s also a great focus on the importance of research with quantitative investing. There’s all sorts of research but the research where I believe there is some critical competitive advantage is more market-oriented research – the nitty gritty stuff rather than conceptual research. If you’re given the challenge of designing a process just for one market, just for the Australian market, you’re going to be focused on a lot of that nitty gritty research.
If you’re given a task of overseeing a quantitative research across a number of markets and potentially multiple products, I think your research has a slightly different, more conceptual flavour to it. That’s not to dismiss the broader conceptual sorts of research but in this particular environment, where the terrain has become much more awkward, the more market-oriented research has come into its own. Matthew Ross: The spread between the best and worst quant manager over this credit crisis period has been about 11 per cent.
The spread between the best and worst value, growth or styleneutral managers have been roughly the same sort of levels, maybe a bit higher. The quants, generally speaking, run lower tracking errors, so you’d expect to see a lower spread between the best and worst quant managers just by the fact that they’re not taking as much active risk as the fundamental managers are. Quantitative investing, also, is not as much of a black box as what some people think it to be. I think there is a lot more judgement, a lot more qualitative oversight. I look at quant funds primarily as the best information processors in the market. They have very strong operational efficiency.