BlackRock, the world’s largest asset manager, is making a big bet on quantitative investing. BlackRock’s quant group has shown strong results, so Larry Fink, the firm’s CEO, wants to double down on the group. That may sound like a good idea, but when you are the world’s biggest asset manager, and you start shifting hundreds of billions, if not trillions, into quantitative strategies, don’t the profits start to erode? Indeed they do.
The FT has more.
With increasingly efficient markets and an arms race between traditional and quantitative investors to be the first to spot even transitory opportunities, quants are faced with a constant challenge of finding research on new signals and data sets. Luckily, the amount of information that can now be collected, and the computing power needed to parse it, is now bigger than ever.
“This is one of the greatest opportunities in active management that I have ever seen,” Mr Kahn says. “It is an explosion of data, technology and analytics and I have never seen anything like this before.”
SAE’s research process borrows from academia. An analyst proposes an investment idea, and is then assigned a “referee” who spends a week trying to demolish the thesis. It then gets presented to an approval board, which decides whether it should be included in investment portfolios and what kind of weighting it should be given. These days, the competitive advantage from such signals can quickly be lost, so SAE often gives a heavy weighting to new signals, and gradually reduces the money allocated as their effectiveness “decays”.
A good example is Glassdoor, where employees can anonymously review their companies. Two decades ago investors might have looked at Fortune magazine’s ranking of the happiest workplaces, but today SAE can systematically monitor for signs of a company’s employees getting happier or restive. That analysis has turned out to be a good predictor of stock returns.
Read more here.