Money managers' unending quest to build a better mousetrap is drawing inspiration from the global financial crisis, with enhanced liquidity, more efficient beta and risk-focused dynamic asset allocation among the themes driving the latest rounds of innovation.
Some market veterans say managers particularly hard hit by the crisis could enjoy some of the more notable advances in coming years: “We're seeing a huge new wave of innovation in quantitative management,” as quant firms integrate investment practices they've honed over the years with risk management to produce “first-rate outcomes,” said Donald H. Putnam, San Francisco-based managing partner with investment bank Grail Partners LLC.
That marriage of previously developed techniques and risk-management architecture amounts to a “rebooting of quant,” after performance woes during the crisis bruised the reputations of a number of firms, Mr. Putnam argued. He cited Conquest Capital Group LLC, Cantab Capital Partners LLP, AlphaSimplex Group LLC, Windham Capital Management LLC and Ryan Labs Inc. as some of the quant firms doing interesting work now.
Opinions on the outlook for broader industry innovation are more mixed.
Some observers expect near-term progress to prove incremental, after investors who adopted newer strategies in the years leading up to 2007 — such as portable alpha — suffered badly when markets imploded.
With investors still licking their wounds, “the innovation boat is unlikely to be pushed out too far” over the next two or three years, concluded a June report commissioned by Principal Global Investors and Citigroup. Pension clients may well set higher hurdles when evaluating new products, with more stringent examinations of their risk-return profiles and insistence on “a strong overlay of human judgment,” the report said.