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Quant funds: confused media

September 15, 2016

 

I was recently searching the internet for a nice quote to be added to my job market paper and once again I noticed how "confused" everybody is regarding quantitative trading.

What is a quant? A weird guy (it definitely cannot be a girl!) with glasses sitting in a corner solving equations? And what is a quant fund? High frequency for sure (not)!! And how do they perform?

The reality is that we know very little about it because not much research exists on this topic. And where reliable evidence lacks, the prevalent sentiment varies over time on the bases of successes/failures of the most prominent players.

I was curious and decided to do a quick exercise with Factiva on the Wall Street Journal archives. It turns out that a quick search is sufficient to uncover this heterogeneity (and cyclicality) in opinions.

From the extreme praising of the emerging quantitative investors in 1990 with a confident “Move over humans, here come the machines” (“Swapping Your Mutual Fund Manager for a Mainframe” – 23 May 1990) to demonizing quantitative investment for failing in changing market conditions, after the LTCM collapse (“Hedge Funds: The New Barbarians at the Gate” - 29 September 1998). Similarly in the mid-2000s, when quantitative managers were displaying superior relative performance, a new wave of optimism emerged (“SmartMoney: Numbers Do the Talking” - 11 December 2005). Only to revert to pessimism following the subprime crisis and the renown “Quant meltdown” (“How the 'Quant' Playbook Failed  --- Federal Filings Confirm the Finger Pointing: Funds Often Shared Stocks -- Leading to Losses” - 24 August 2007). In recent years a bullish view on quantitative investment has again emerged, but we can only assume it will be short-lived (“Quant Stock Funds Make a Comeback” - 28 July 2014).

From the above examples there is only one clear take-away: there is no consensus on whether quants are "good" or "bad" (provided we can even agree on what they are). This leads to questioning whether they are a fading trend on the verge of extinction every time that their relative performance worsens. The lack of formal academic studies on the topic determines that flickering opinions might be the only source of information for potential fund investors and even regulators. The views expressed in the media, though, are likely partial and biased. For instance the failure of large, known funds makes more headlines than good performance. This is also due to the secrecy of most quant fund managers who shy away from attention for the fear of revealing information to competitors. Another example is the “quant meltdown”. It is generally accepted that quantitative investment performed poorly during the subprime crisis. What most news outlets failed to mention is that the funds mostly affected were equity long-short funds, whereas, in the same period, quantitative macro hedge funds were the absolute top performers, boasting returns up to 40%!

It is time to start eliminating this confusion!! 

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