Hello Quants? Innovation Calling

Pete Millington

Pete Millington·– May 14th, 2021

Quant funds have had a rough go of things lately. Investing in the era of the pandemic has renewed talk of “paradigm shifts” and “new normals”. It is worth asking the question: Can historically-steeped, factor-based quant strategies survive in the upside-down world dominated by Robin Hood collaborators, Archegos-driven machinations and a Fed-fueled investment frenzy?

A recent study by Refinitiv highlighted the fall-out of the pandemic on the quant industry. In the study: “Refinitiv said 72% is such investors were hurt by the pandemic. Some 12% declared their models obsolete and 15% were building new ones.”

It was “A terrible, horrible, no-good year for quants”, states Robin Wigglesworth, in his recent Financial Times article.

As Amy Whyte of Institutional Investor explains in her January 15, 2021 article: “The Main Reason Quants Have Performed Badly? Value”, quant managers need to diversify away from their long-term love affair with value investing. “Systematic investment strategies are failing to outperform — and one particular investment style is to blame” she writes in reference to a report by researchers at BNP Paribas Asset Management.

However, it is worth recalling that many observers had prematurely declared quant investing to be dead following the financial crisis of the late 2000’s, as highlighted in the September 7, 2010 article “The Failure of Quant Funds” by CBS News in which the authors declared: “In aggregate, quant funds have failed to deliver on their promise.”

The NY Times struck a similar tone back in August 2010 with their article “Shrinking ‘Quant’ Funds Struggle to Revive Boom” in which they lamented the drop in quantitative assets under management to $467B.

With the benefit of hindsight, we now know that quant strategies bounced back strongly in the subsequent ten years, reaching nearly $1T in AUM by January 2018 as highlighted in this FT article.

In a pre-pandemic (January 2020) interview highlighted in a Bloomberg News article, Marko Kolanovic, Global Head of Quantitative and Derivative Strategy at JP Morgan stated: “The next severe recession will put the new market structure to the stress-test, and that may lead to widespread failures. Quant models that are calibrated on historical data will not be able to anticipate these events.” Mr. Kolanovic’s comments were quite prescient, as the pandemic lead investors into uncharted territory.

Question: So, where does all this leave the quant investment community?

Answer: Quant managed funds will survive and thrive, but they must evolve and improve in response to these recent lessons.

Quant approaches ultimately reflect a powerful, disciplined, highly informed “intelligent” investment approach. However, this intelligence is not (yet) completely artificial in nature.

Experienced quant managers are still needed to guide the next generation of quant investing. As Anthony Todd, CEO of Aspect Capital stated in his recent Bloomberg interview: “This rich set of new data provides a world of opportunity for quantitative research. However, a manager’s experience remains key to efficiently extract a persistent signal from the noise.”

These latest developments serve as a reminder that the quant community must continue to innovate. New data, new techniques and new insights are needed. The flexible, next-generation tools we have built at Scientific Financial facilitate rapid financial innovation. Our Quotient product was built for times like these.

As Robin Wigglesworth concludes in his recent article: “It would be a brave person who declares that the sun has set on quantitative investing. One could argue that the entire money management industry is – to varying degrees – nowadays driven by quant research in some form or fashion. This is a trend that is only likely to accelerate in the coming years. We are all quants now.”