Revolutions don’t happen overnight. And as we celebrate Independence Day in the Unites States this week, there’s a lot that portfolio and asset managers can reflect upon as they think about the upheaval happening around them. The industry is in the middle of its own revolution were data is changing nearly every decision that’s made every day. It’s a foregone conclusion that investors who don’t use data to their advantage will fade away in an environment where it’s getting harder and harder to develop unique strategies that find alpha.
Even when they’re not performing as well as traditional funds, quant funds still seem to be the darlings of Wall Street. That’s because the revolution is just beginning – everyone’s watching the sprint to see who can use data best because they know it’ll be a marathon to build and iterate on these early strategies and win in the long run.
It might seem like “The Quants Run Wall Street Now” because things are certainly moving in that direction. But fundamental managers shouldn’t give up the fight just yet.
While everyone leaves lower Manhattan this week to see how many hot dogs they can eat on Coney Island, or more likely catch a few rays in the Hamptons or on the Jersey Shore, it’s worth a quick history lesson. Not just to remember and honor a country’s humble beginnings, but to examine how one revolution might be similar to another.
On the outskirts of Boston, not far from where Elsen is headquartered, the Shot Heard Round the World rang out in April 1775 to mark the beginning of the American Revolution. More than a year later, the Continental Congress adopted the final language of the Declaration of Independence on July 4, 1776 to officially break from the rule of the British Crown and form a new nation. But the fight raged on for another five years and it wasn’t until October 1781 when George Washington and the American Continental Army raised a flag over Yorktown, Virginia to mark the end of the Revolution.
At the time, the idea of democracy – a self-governed people – was entirely new. This great American experiment is still constantly evolving, built on the free exchange and debate of ideas from bold thinkers, and has been adopted in similar forms around the world. In 1781, no one thought that that the United States and the United Kingdom would be allies nearly 250 years later. But the two countries now have one of the strongest bonds among nations, and have for some time.
There’s a lesson here for quants and fundamental managers, and it’s that their fate will likely be similar. Yes, both disciplines can co-exist and the democratization of technology will help to make that happen. The free exchange of ideas is powerful, and while investment strategies will all become data-driven, the best will incorporate knowledge from both quants and fundamentals. This will begin to happen more as technology becomes easier to use and fundamental managers gain access to quant-like tools.
While we celebrate the birth of a nation this week, let’s remember that revolutions can be tumultuous, but they’re about new beginnings that can create a better future for everyone. Happy Fourth!