Quantitative investing has taken a battering during the global financial crisis, with many big firms suffering lower-than-average performance for much of the past two years. But the stuff that gave quants a compelling story before investor behavioural biases – is now helping them again.
With a return to normality in markets, quant managers have in recent months started to better exploit the long-run performance qualities of value, growth and momentum styles.
According to Didier Rosenfeld, the head of EAFE and global equity strategies for State Street Global Advisors (SSGA), the factors which have served quant managers well for years were again starting to work as economies stabilise.
“The long-term thesis on quant performance remains compelling, he told a client conference.
However there are a few things which quant managers could do to reduce the risk of underperformance during turning points in the market.
Quant models needed to become more sophisticated in their use of factors, Rosenfeld said. Quants also needed to invest in quality data inputs and they needed to be more thorough in reviewing and using their models.
Rosenfeld suggested that quants should consider introducing more dynamism into their processes. For example, when price momentum factors have had a good run, maybe the manager could take some risk off the table.
“The investment in research is paramount for quants, he said. “They have to invest in robust processes.
A simple quant model of 50 per cent value and 50 per cent momentum would have provided consistent outperformance over the long sample period of 1968-2009, except for around the time of the tech bubble in 2000-2001.
Rosenfeld said the current environment provided considerable opportunity for alpha generation by quant managers.
Valuation factors had historically provided strong outperformance after big market corrections. Stock dispersion was currently at its highest level since the late 1990s and book-to-price dispersion was at its highest level since 2000.
The client conference was held in Sydney on October 28.