Quantitative money managers are retooling their formulas and product lineups as they attempt to reverse the drought that began almost three years ago, when spiking market volatility turned the quant feast to famine overnight.
A turnaround can't come soon enough for some quant managers, who have seen continued outflows short-circuit the benefits rebounding equity markets have provided the broader money management industry in the past year.
During the latest quarter, quant firms of all sizes reported continued outflows — from giant BlackRock Inc., which reported $8.8 billion in quant-related outflows, to midsize INTECH Investment Management LLC, which lost $4.3 billion, and boutique Clarivest Asset Management LLC, down $503 million.
Quant firms suffered $100 billion in net outflows from 2007 through 2009. During the boom years between 2002 and 2006, net inflows reached $200 billion, according to data from Casey Quirk & Associates, Darien, Conn.
On the positive side, a number of quant firms in recent months have reported that the return of more stable market conditions this year is allowing their computer-driven investment models to outperform their benchmarks again.
For example, executives at INTECH parent, Janus Capital Group, on a conference call to report March 31 results, noted that while none of INTECH's strategies had outperformed on a 12-month basis, near-term results were improving. They said that more than 75% of the strategies had outperformed their respective benchmarks over the last six months.
But investor skepticism remains.
Yariv Itah, a partner at Casey Quirk, said the performance of quants during the recent financial crisis has tested their investment models. First quant managers suffered dramatic losses in the August 2007 meltdown. Too many firms seemed to be holding the same stocks, setting off a vicious cycle as redemptions mounted — putting their models under a cloud of suspicion.
He said plan executives are worried that these models could result in dramatic losses again.
“There is a perceived risk, probably exaggerated, that you are only one day away from disaster,” he said.
He predicted that flows for quant firms will remain “broadly negative,” which could result in a number of firms going out of business in the short to midterm.
Mr. Itah said successful quant shops will be those convincing investors that their models are different from competitors' and more apt to withstand market turmoil.
“Some of the old models missed the inflection point in '09. As the market improved through 2009, the models didn't adapt to the shift,” he said.