Managing through a Crisis: Practical Insights and Lessons Learned for Quantitatively Managed Equity Portfolios

Peter J Zangari

What challenges do investment professionals face when they manage portfolios through a financial crisis? What lessons can be learned from such an experience? In this chapter, we discuss how the 2007–10 credit crisis affected¹¹ Throughout this chapter, we refer to the crisis as a past event. We do so simply because we can point to past events or “shock waves” associated with the crisis and explain what they taught us. This is not a statement about whether or not we believe the crisis is over at the time of writing in September 2010. quantitative equity investment management and how this experience will affect this investment style for years to come.²² We use the term “quant” as shorthand for “quantitative equity manager”.

Quantitative equity portfolios invest primarily in stocks and are actively managed against a benchmark. The benchmark may be a well-defined equity portfolio (eg, the S&P 500 Index portfolio) or the risk-free rate (cash). Portfolio weights are derived, in part, from computer-based models and result from a systematic, reproducible³³ That is, a manager can reproduce their investment results from first principles. investment process. Their underlying investment