A growing number of quantitative equity managers are striving to better match their computer models to changing market environments as they fight to reverse their performance drought since the start of the financial crisis in mid-2007.
Before the crisis, the weightings quant firms allocated to the broad components of their alpha models for factor-driven strategies were “pretty static,” said Soonyong Park, a managing director and head of global portfolio solutions at investment consultant Rogerscasey LLC, Darien, Conn.
At the height of the crisis, however, many found the performance hit from short-term volatility simply “too great to bear,” Mr. Park said. As a result, more firms are working now to make the factor weightings “conditional on the market environment.”
Industry veterans predict those efforts could result in a clearer division of winners and losers than was apparent during the halcyon years leading up to the crisis. Back then, the value and small-cap equity signals favored by the majority of quant firms paid off broadly in terms of both strong investment gains and heavy net inflows.
Another development cited by some observers is a decline in public debate about the factors quant managers are incorporating in their models, reflecting greater efforts to preserve competitive advantages as long as possible.
In mid-May, executives at BlackRock Inc. — the New York-based bond giant that became a quant and index behemoth as well with its December acquisition of Barclays Global Investors — announced they were working to make their models more flexible.
Blake Grossman, vice chairman and head of scientific investments at BlackRock said in a letter to clients and consultants that the firm is “shifting our approach from relatively static tilts toward more dynamic portfolio positioning suited to the specific market context.” The move is one of several “enhancements” aimed at ensuring strong investment performance in the future, he said.
BlackRock has faced some difficult times with its active quantitative equity business, which oversaw $144 billion as of Dec. 31. Several of BlackRock's biggest “alpha tilt” quant offerings — including its $17 billion Alpha Tilts Fund (2% risk); its $6.6 billion Russell 1000 Alpha Tilts Fund and its $4.2 billion Russell 3000 Alpha Tilts Fund — have trailed their benchmarks for the one-, three- and five-year periods through March 31.
Rather than a prolonged stretch of underperformance, however, it was 2007 — when a number of its strategies underperformed by four or five percentage points —that weighed down the three- and five-year numbers. Many of those strategies outperformed their benchmarks the following year, as volatility was peaking.
Ken Kroner, who earlier this month was named BlackRock's chief investment officer and head of scientific active equity, declined to provide details about the changes in the firm's active quant business.
Investment consultants say the broad pressures facing quant managers now have led many to implement — or consider implementing — similar moves. “There were a number of managers that had relatively static models three years ago that are more dynamic today,” noted Keith H. Black, an associate with Chicago-based investment consultant Ennis Knupp & Associates Inc.