The “Battle of the Quants” investing conference had its 11th annual event in London in 2016. While I believe there was at one time an actual charity boxing match featuring a few bouts of light sparring between hedge fund managers, this event is conceived as more of a round table forum to discuss and debate recent innovations in quantitative analysis as well as was held annually at some storied London venue.
But the title of this post refers to another battle – and one that the Quants seem to be winning. This is the encroachment of quantitative investing styles within traditional and hedge fund managers – often to the detriment of fundamental investing styles. Earlier this year in March, we saw the dramatic decision by Blackrock to shift a series of fundamentally managed equity funds to quant strategies. Chief Executive, Larry Fink, said at the time:
“BlackRock embraces change and turns it into an opportunity . .(w)e are constantly anticipating how macro trends will reshape both our industry and our clients’ needs. We then pivot accordingly.”
https://www.ft.com/content/b0056320-13e3-11e7-b0c1-37e417ee6c76
This comes after similar shifts by PIMCO to slowly shut down active fundamental equity strategies that it had run since 2010 over the course of 2015 and 2016, and GMO, which in June 2016 announced that it would discontinue its firm’s fundamental stock selection efforts.
Just today we read that this trend had spread (again, subtly and behind the scenes) to hedge fund managers in a discussion of Magnetar, an Evanston Il based hedge fund manager with close to $13.5 bn in AUM. In a shift to adapt to both waning investor interest and lack luster returns in traditional strategies such as convertible bond arbitrage the manager is pouring large amounts into technology, in particular in field of AI and rules-based investing.
Other interesting observations made in the article include the replacement of a head trader by a committee based approach, mitigating key man risk and ultimately devolving decision making as well as the introduction of a barbell approach in energy investing – relying on only high risk/reward trades and ultra low risk trades – a strategy that paid off recently.
It is interesting to watch stealthy adaptation in the face of lack luster returns and investor disenchantment. It is an alluring pitch without a doubt – capture the magic of AI and big data and outmaneuver the human brain at a time when we are all fearful of being outmaneuvered. As it is impossible to improve the negative – that such strategies “do not work” , investors may give them the benefit of the doubt, given the uncertainty of the future. What is beyond a doubt is the writing on the wall for fundamental managers who may, at this time, be rightfully fearful of their place in the investment ecosystem. We will return to this theme many times over the next year.
https://www.wsj.com/articles/this-old-school-hedge-fund-is-going-quant-1495635267