His report — “Re-QUANT-ifying your portfolio; Is now the time?” — was written with Dennis Ruhl, head of U.S. behavioral finance quantitative research and small-cap strategies. In the report, the duo say: “With volatility normalizing, hedge funds de-levered and less competition in the space, the environment appears to be increasingly favorable for quantitative investors.”
Mark Thurston, head of global equity research with Russell and the author of his firm's report, “Quantitative equity management — Despite the recent lag, quants provide diversification and alpha opportunities,” agreed.
“The environment now is more favorable than it has been” for a long while, Mr. Thurston said in a telephone interview.
For example, momentum — a staple of computer-driven models that “whipsawed” quant managers during and immediately after the global financial crisis — was paying off again in the first quarter of 2011, as were revisions of analysts' estimates, Mr. Thurston noted. In the topsy-turvy market environment between 2007 and 2010, many quants found themselves forever a step or two behind their active brethren as cyclicals yielded pride of place to defensive stocks after July 2007, only to come back with a vengeance after March 2009, he said.
Both reports similarly examine — and dismiss — the argument that quant strategies were veritable peas in a pod in the run-up to the global financial crisis, with computer models crunching the same factor-related data and funneling money into the same “crowded” stocks. Mr. Ruhl said, “We're not convinced that was a big factor,” with the enormous leverage employed by a raft of hedge funds investing in the same stocks by the summer of 2007 accounting for much of the collateral damage felt by long-only quant firms.
Mr. Thurston said Russell's data — looking at rolling three-year excess-return correlation data between pairs within the Russell universe of roughly 75 core U.S. equity-focused quant managers — showed “very low” correlations of between 0.09% and 0.15% from June 30, 2006, to March 31, 2010.
Meanwhile, Messrs. Thurston, Dimig and Ruhl agree in citing the sharp retreat from quant strategies over the past three to four years as another reason the lingering fear of “crowding” may be overblown.
The amount of assets in long-only active and enhanced quant strategies, which peaked at $1.8 trillion in 2007, has fallen to roughly $750 billion today, while 300 of the 800 long-only quant strategies offered at that peak have disappeared, according to data from eVestment Alliance, Mr. Dimig noted.
Finally, both studies conclude that correlations between quant managers and fundamental equity managers are extremely low — pointing to diversification benefits for institutional investors that replenish the ranks of quant managers in their portfolios.
The pair-wise correlations between the roughly 75 managers in Russell's core equity quant universe and the roughly 175 fundamental core U.S. equity managers ranged between 0.03% and 0.07%, Mr. Thurston noted.
The J.P. Morgan paper, examining quarterly correlations of alphas from January 2004 through December 2008 between 1,171 fundamental and 301 quantitative equity managers, found an average pair-wise correlation of 0.1%.
Those results suggest that a mix of traditional and quant equity managers will provide investors with better diversification than a portfolio with only fundamental managers or only quant managers, while the low correlation among quant managers suggests further benefits from adding more than one, Mr. Thurston said.
The authors of both reports concede their call to reconsider the charms of long-only quant equity managers now amounts to leaning against the wind.