In a recent article titled “The Quants Run Wall Street Now,” Wall Street Journal reporters Gregory Zuckerman and Bradley Hope outlined the ways in which quantitative strategies - and quants themselves - have become an integral part of hedge funds and other investment firms.
Today, quant firms and strategies are growing in terms of overall trade volume. Zuckerman and Hope cited data from the Tabb Group that showed that “quantitative hedge funds are now responsible for 27% of all U.S. stock trades by investors, up from 14% in 2013” and are also outperforming hedge funds as a whole in terms of growth. With changes to the regulatory environment and an ever-growing abundance of data, fundamental strategies are giving way to more quantitative and algorithm-based approaches.
As it happens with most trends that start picking up speed, firms of all kinds are rushing into hiring more quants. There is, however, reason to slow down and avoid getting swept up into the quant mania.
As the WSJ reported, some analysts have hesitations about firms that want to go head first into the quant business. First and foremost, it’s no guarantee of profit, no matter how talented the hires are. It’s not simply a matter of hiring several Ph.Ds and expecting overnight success.
Second, firms should remember what happened in 2007: “What became known as the “quant meltdown” was caused largely by the similarity of strategies among quants, who simultaneously rushed to sell, causing losses at other firms and more selling,” the WSJ noted. Essentially, if everyone is using quants, it could lead to major market disruptions due to too much uniformity between firms’ strategies, which would erode any competitive advantage.
Third, it’s easy to become overly dependent on quants and assume that the algorithms are more reliable than they really are, while ignoring insights generated through other strategies. There is still a newness to these complicated quantitative approaches, and while they add a new layer of complexity and depth to research, they aren’t the end-all-be-all of running a profitable shop.
What should firms take away from this?
As we discussed in our previous post, “The rise of the quantamental investor,” finding a balance between traditional and quant approaches will likely be the way forward. Already, major hedge funds are going the “man plus machine” route, or what’s being known as the “quantamental” approach.
The WSJ article concurs, and points out that “investors are shifting their preference from ‘artisan to engineer.’” At Elsen, we’re helping the “artisans” become engineers without requiring them to work alongside massive teams of quants just to test their ideas.
What Zuckerman and Hope have found further confirms our vision of helping portfolio managers augment their existing processes with premium data, fast processing speeds, and intuitive dashboards that help specialists and non-specialists alike quickly analyze data.
Portfolio managers can use proprietary programs built on the Elsen nPlatform to build models and test strategies quickly, using up-to-date data. They can adopt quant tactics and incorporate them into their existing approaches to minimize chances of being over-reliant on pure numbers, but still having the ability to add additional research capabilities to their processes.