Produced in partnership with Robeco
Quant investing involves systematically identifying stock and company characteristics that explain differences in returns, such as value, quality and momentum, as well as newer signals derived from alternative data sources like news flow and sentiment.
Unlike human analysts working on fundamental strategies, quantitative models can analyse thousands of stocks at the same time, resulting in more diversified portfolios. This can be appealing to more active risk-sensitive investors.
Another difference is that a quantitative approach, given its use of rules-based methods, removes emotional biases from the process. In contrast, fundamental strategies rely on more qualitative analysis and can be influenced by human emotions, such as holding onto losing positions or chasing gains due to fear of missing out.
Despite their differences, both approaches aim to uncover mispricing and capture value. Their relative performances tend to be uncorrelated, making it beneficial to combine both for balanced portfolio exposure and risk management.
Robeco quant strategies leverage an in-house risk model to manage active risk. This risk model ensures broad diversification of the strategy and can therefore weather volatile market conditions. Moreover, we have a proprietary distress risk indicator in place which acts as an overlay on the portfolio and prevents the model from taking positions in stocks close to default.
These in-place models are purely statistical and therefore don’t suffer from any biases that humans might have in volatile markets. A human overview committee can decide to overrule the model in circumstances in which the model is deemed unable to capture market circumstances; however this is most often the exception rather than the rule.
Seems complicated
Australian superannuation funds appreciate quant strategies that are explainable, transparent and robust. This challenges the common myth that quant is complicated and opaque, but contemporary strategies are glass box, not black box. We suspect that this perception arises from some quant hedge funds or high-frequency trading funds.
Australian institutional investors are also adopting quant strategies for a diverse range of purposes. For example, enhanced indexing strategies are a well-regarded alternative to passive investing. With attractive fees this product range aims to deliver the index plus additional returns while limiting active risk.
Quant mandates can also be used to target deep and enhanced exposure to proven market factors like value, momentum, quality and low volatility. These products have predictable characteristics and follow a consistent and predictable investment process.
AI and other technologies
There are exciting developments in AI-related research techniques such as machine learning and natural language processing. These advancements enable the identification, testing and capture of subtle signals that traditional models still overlook. For example, we’re augmenting our existing strategies and developing products with next-gen quant signals.
These developments include gaining unique insights by tapping into alternative datasets. One example is a “job momentum” signal, which gauges a company’s health by tracking job vacancies.
However, the dramatic increase in both the volume and variety of data available is a blessing and a curse. Quants compare the wealth of data to a candy shop: all these new data sets look super exciting and have shiny packaging, but you cannot try to eat everything you see as that would be bad for your (financial) health.
Furthermore, when you critically access it, you will find out that some data does not meet your quality standards, and that some data is just “old wine in new bottles”. A true edge may be gained in reliable signals from this vast sea of information.
Another point to consider is choosing managers who are not solely quant-focused. These managers should be able to connect with their internal fundamental investment teams to foster an exchange of ideas. Fundamental colleagues can inspire new research ideas for the quant team and provide feedback on them, while quant insights are, in turn, considered in fundamental analyses.
Mike Chen is the head of the Next Gen Research team at Robeco, based in Boston, and will be visiting Australia in July this year.
Find out more about quant investing and active quant strategies
