In recent years, the demand for quant-based investment products by professional investors has increased at a stellar rate. Today, the product range is diverse with products related to risk parity, smart beta, and factors making their way into the investor lexicon — even at the retail level.
In this blog post, Andrew Perrins, CEO of Savvy Investor, examines the evolution of the quantitative landscape for the modern quant professional with reference to trend following, factor investing and emerging markets. Savvy Investor www.savvyinvestor.net is the world’s leading knowledge network for institutional investors, aggregating investment white papers from practitioners, asset managers, and academics. Membership is free.
Although quantitative investing has existed in various forms for decades, its evolution has come on leaps and bounds from the days of manual calculations, logarithm tables, and graph paper. As paper and pen gave way to binary and silicon in the 1960s, the quant researcher was able to crunch data at great speed thanks to new computing power and data input from Standard & Poor’s Compustat tapes.
Possessing a mathematical skillset during this period in history wasn’t commonly associated with matters of investment, however. Indeed, many of those considered quants today, would have been engaged in data conundrums such as how to land a man on the moon and how to harness and distribute nuclear power.
"Pursuit of knowledge, understanding and statistical edge are the raison d'être for today’s quant."
For the modern quant attending the Quant Conference, one may argue that the mathematical research of financial markets has its origin in the inspiring story of Edward Thorpe. A pioneer in the research of mathematical games, Thorpe was able to fit a tiny computer in his shoe, which was programmed, not only to calculate the velocity of a roulette ball, but also the likelihood of it landing on a particular area of the wheel. Understandably, his “research”, which gave him an “edge”, made him unwelcome in Las Vegas and he found himself adapting his skills to financial markets some years later.
For the quant professional, Thorpe’s casino game research could be considered as innovative and brilliant. For the layman, his investigation: beautifully rebellious. Yet his pursuit of knowledge, understanding and a statistical edge mirror the raison d'être for today’s quant practitioner.
Inside the Mind of a Quant
Where there are misconceptions from the broad financial community regarding what quants actually do, the essence of current quant thinking and how practitioners approach their craft is well represented by SSGA’s podcast Inside the Mind of a Quant. This podcast offers insights that dispel the myths surrounding supposed quantitative short-termism. The participants highlight that it isn’t all about the short-term exploitation of market inefficiencies. Although high-frequency strategies are certainly employed by some, a myriad of comparatively longer-term, multi-product and multi-timeframe approaches are also commonplace.
As the panel in this podcast discuss, since the nature of product offerings can be determined as much by investor appetite as financial results, strategies can and do differ with reference to investment holding periods and overall time horizon of the strategy. For example, Quality and Value factor strategies have a decidedly longer holding period than Momentum. As a result, drawdown depth, length and pay-off periods can differ markedly.