Active quantitative managers are trying to stand out from the crowd.
Active quant managers suffered a crisis in confidence when most of their strategies plunged in value simultaneously in August 2007 because they were chasing the same alpha sources.
Now, these managers are seeking out new sources of alpha — hoping to stay one step ahead of their competition.
“The first thing you have to do is to get out of the standard well-known sources and bring in factors that are not as well known,” said Robert Litterman, New York-based managing director and head of quantitative resources at Goldman Sachs Asset Management, which had $86.6 billion in quantitative assets under management as of Sept. 30.
The “quant quake” occurred in August 2007 before the financial crisis hit the broader market in 2008, said Daniel Celeghin, partner at Casey Quirk & Associates LLC, Darien, Conn., in an interview. “A lot of signals were being used by leading managers to buy the same stocks. The end result was a series of very crowded trades, and things turned out very badly” for quants.
“What we've seen since then is a lot of soul-searching,” Mr. Celeghin said. “Since '07, I don't know of any quant manager who hasn't taken a fresh look at the (investment) model.”
This is leading quant managers to scour for new factors to add to their investment processes.
“Basically, there are four things that we're doing to try to adapt to the new environment,” Mr. Litterman said at the Quant Invest 2009 conference in Paris earlier this month. “We're focusing on proprietary factors; we're focusing on allocating the risk across factors opportunistically; we're changing overall allocation of risk; and we're looking at event-driven opportunities.”
Managers will have to find new factors, new inefficiencies and generally new sources of alpha — all the while keeping an eye on the sort of extreme risks that trampled on performance in 2007 when the credit crisis hit, said E. Paul Rowady Jr., Chicago-based senior analyst at the TABB Group, a financial research and advisory firm.
Data for total assets in quant strategies are difficult to collect because many investment processes rely on both quant and fundamental drivers, consultants said. However the TABB Group estimated that quantitatively managed assets in U.S. equity — including passive and active strategies — totaled $3.47 trillion in 2009, or 34% of total U.S. equity assets. That's a 30% increase from 2008 and 9% more than 2007.
Managers are considering adding opportunistic investing drivers that include event-driven strategies, catastrophe insurance, commodities; credit, emerging markets and volatility trading. Timing factors also holds potential, according to several managers.
“It's difficult to time factors, so the question is whether it would be worthwhile to try and time factors,” Mr. Litterman said. “Modulating our risk is something else we think will be important going forward. ... What we're thinking about doing is allocating to signals that are less susceptible to financial disruptions, reducing the overall risk” of the portfolio.