Quantitative strategies have become a “competitive necessity” among global asset management strategies but at the expense of alpha, according to a news release on a new TABB Group report.
The report, “The Investment Assembly Line: Alpha Discovery and the Illusion of Automation,” notes that active quant strategies now account for 9% of all U.S. equity assets under management, and the quantitative assets in those strategies account for about 33% of all U.S. equity AUM, up from 14% in 2000.
Although comprehensive strategy automation platforms remove administrative burden, the remaining question is “whether this dramatic improvement in theoretical productivity has been washed away with the decaying half-life of many or most forms of alpha,” according to the news release.
The report’s authors, Adam Sussman, TABB director of research, and E. Paul Rowady Jr., a TABB senior contributing analyst, said in the news release that full or partial automation eventually will move into alternative as well as traditional strategies.
“If automation can cause alpha to decay more quickly, then while automation is inevitable, the efficiencies gained by it may ultimately be offset by the cost of more rapid decay,” Mr. Rowady said in the news release. “However, since alpha discovery is still very much a manual process, the cost of discovery remains high.”
The report discusses the history of quantitative strategies and identifies the upsides and downsides of using such methods.
“While the road to increased strategy automation doesn’t guarantee success, it’s a road that must still be traveled,” Mr. Sussman said in the release. “The current velocity of intelligence — and the margin of information arbitrage awarded to those with computational superiority — simply demand it.”