In relation to assessing a quant manager, although it’s true to say that a number of them have very similar approaches, the way that they go about putting the pieces of information together can be quite different. Some look at all the factors and put them together concurrently, others look at them independently and put baskets of portfolios together. To my mind, a big differentiator is not just what factors are used but what access to information they have. And we can see that there are differences over time between those that are relying on information that comes out (publicly) versus those that have built up proprietary databases. You tend to find that the bigger firms do that.
So it’s a positive for them but obviously they have more funds under management, which is a negative. We would normally expect human judgement in a number of places. First thing is in looking at the data and making sure that it makes sense. That’s just a given. Secondly, where we do see a little bit of difference between managers is where they recognise that there may be something going on in the market which means that that model is less reliable, so they exercise judgement to change the weighting to those components of the model.
If you think about what’s gone on and what’s been driving the markets and you look at the way that most quant managers operate with their risk controls, you can explain why at this point in time the returns haven’t been as strong for the risk taking compared to the fundamental managers who got it right. But now these things work in cycles. This is a very extreme environment with quite significant themes at play. And I think to say that this is the beginning of the end for quants, I think, is probably a little bit premature.
Ross Blakers: In terms of the market conditions, it has been nothing short of extraordinary and a lot of investment styles have been affected. It’s been a very difficult time for active management generally across the board. I think one thing from the market conditions and particularly affecting quants is the cross-sectional volatility, which is at extraordinarily high levels. This is a twin-edged sword. Normally when you have higher cross-sectional volatility or greater dispersion between the best performer and the poorest performing stocks, that ideally sets a nice platform for active management to generate outperformance.