The exciting frontier of quantitative investing, which has drawn huge inflows over the last ten years, is suffering a rough patch that is raising questions, according to an article in the Financial Times.
The article reports that, according to Nomura, just 15 percent of quant mutual funds beat the US stock market last year, “a performance that trailed even behind traditional stock picking funds, which suffered their own poor run.” Nomura’s head of quantitative strategies, Joseph Mezrich, said the industry is going through a “quant winter”, a view echoed by AQR’s Cliff Asness who added, “We don’t know how to predict them, or when they end, but we know they occur.”
Quant funds, which the article explains “harness mostly bigger, well-known ‘factors’ “ such as earnings growth or momentum, “tend to scour markets for fainter, rapid signals, and are usually staffed by scientists and programmers rather than people with a background in economics or finance.”
Some quant firms are cutting headcount, the article reports, including AQR, which suffered a fall in AUM by almost a fifth over that past few years (to $186 billion).
Still, the article notes, the industry’s performance has “hardly been disastrous,” with quant mutual funds returning an average of 27.7 percent in 2019 (data from Bank of America) and quant equity hedge funds returning 11.8 percent (data from HFR). While this is weaker performance than that of the broader stock market, the article notes, it “still represents a decent year in nominal if not relative terms.”
As to whether the trend will continue, Asness argues that the discomfort of rough patches is exactly why many factors continue to work over the long term: “Of course, this is like saying, ‘there will be a bear stock market again.’ It’s absolutely true, but if you can’t predict when, you stay invested and earn the long-term return.”
Mezrich argues that weaker performance is explained by lower bond yields, which make previously divergent factors more correlated: “It’s mainly because macro isn’t ‘part of their risk management repertoire.”