![Risk.net](https://www.risk.net/sites/default/files/styles/print_logo/public/2018-09/print-logo.png?itok=1TpHrpuP)
Stock-pickers take note: the quants are coming
Quant funds are turning their hand to fundamental investing
The chief executive of a discretionary equity hedge fund might seem an odd choice to include on a panel at a quant conference. But G Squared Capital’s presence at Battle of the Quants in New York earlier this month illustrates just how much crossover is occurring between the two philosophical encampments of the investing world.
G Squared takes a hybrid quant-fundamental approach, using artificial intelligence algorithms to analyse 10,000 data points per company and make investment calls.
The firm is in the vanguard of a quant fund push to mimic their fundamental cousins – now that the quants have a mounting pile of new data to crunch and machine learning algorithms to help make sense of it.
Michael Graves, chief executive of global stat arb hedge fund Nebula Research, who spoke on the same panel, said quants are starting to work on the questions fundamental investors used to see as their own: how is Apple’s new launch going down, or have Tesla’s plans hit a speed bump?
Nebula, for example, now trades an equity long/short strategy in a systematic fashion. “We are mixing some of their techniques with our techniques and trading on different timescales,” Graves said. He hopes the explosion of alternative data and improvements in computer processing power means the firm can do it better.
Michael Recce, chief data strategist at fundamental asset manager Neuberger Berman, predicted the amalgamation of systematic and fundamental methods of investment “will be larger than the original quant revolution”.
Neuberger acquired quant research firm Breton Hill Capital in 2017 to deepen its capabilities in that area.
Recce described fundamental investors as having knowledge “an inch wide and a mile deep”. In other words, they know a huge amount about the future value of just a handful of companies.
Imagine if you are building artificial intelligence that acts like a discretionary trader. You get the alpha of the discretionary guy and the leverage of the quant
Michael Recce, Neuberger Berman
They can generate a lot of alpha from those few select bets. But they are limited in their use of leverage by the high idiosyncratic risk in their portfolios.
Quants on the other hand, gather knowledge “an inch deep and a mile wide”. They do not know much about individual companies, but they rely on finding mispricing patterns that repeat across many stocks over time.
Although systematic strategies typically only have access to relatively little alpha, they can lever up to achieve comparable returns to discretionary managers, Recce said.
“But imagine if you are building artificial intelligence that acts like a discretionary trader. You get the alpha of the discretionary guy and the leverage of the quant.”
This is the sweet spot for quants – to include alternative and additional fundamental company data in their models. Recce insists machine learning analysis on alternative datasets will be an advantage to any quant firm looking for inefficiencies in the market.
He pointed to January 3 this year when Tim Cook announced that Apple had sold fewer phones than anticipated in China, wiping $75 billion off the company’s stock.
“Everyone was surprised, but all those phones have carriers, make calls and have apps. The data is absolutely in the world, but it is not in the market,” he added.
JP Morgan Asset Management and Golden Sachs Asset Management are among those to champion the use of algorithms to trawl though news and social media to understand what is happening at companies before anyone else.
“If you watch news and social media carefully and use algos to read it, then you can find out something is going to happen before everyone. Say Panasonic is going to opt out of investment in Tesla’s Gigafactory. You don’t know what the true value of Tesla is… but you know temporarily that Tesla stocks will go down so the race is on for who can trade on that the fastest,” Recce said.
The next big trend in quant, it seems, could be a return to fundamentals.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Our take
Podcast: Lorenzo Ravagli on why the skew is for the many
JP Morgan quant proposes a unified framework for trading the volatility skew premium
Quants see promise in DeBerta’s untangled reading
Improved language models are able to grasp context better
Counterparty risk model links defaults to portfolio values
Fed’s Michael Pykhtin proposes using copula models to capture effects of margin calls on default risk
Does Basel’s internal loss multiplier add up?
As US agencies mull capital reforms, one regulator questions past losses as an indicator of future op risk
Is JSCC-CFTC stalemate about to be broken?
Japan CCP gains allies in battle to clear yen swaps for US clients, but CFTC shakeup could dash hopes
What T+1 risk? Dealers shake off FX concerns
Predictions of increased settlement risk and later-in-the-day trading have yet to materialise
Go your own way: departures pose new challenges for CFTC
Loss of Democratic majority would impede chairman’s ambitions for regulatory agenda
Altice’s dropdown is a warning for European creditors
Carve-out used to shield assets from lenders may occur in a fifth of European deals