The Quants are back....

Yesterday's Terrapinn conference on quantitative investments in London, QuantInvest (details), was full, indicating a strong interest in this analytical style that seems to have fallen from favour since last summer.

The quantitative analysis technique seeks to understand behaviour by using complex mathematical and statistical modelling, measurement and research. By assigning a numerical value to variables, quantitative analysts try to replicate reality mathematically.

Illustrating some of the thoughts that flied around, a quant researcher told Opalesque that now was the time to invest as the 12-month momentum, which started in August last year, had just finished. "Investors have shied away from stocks but now want to enhance and add more factors to the quant processes - although they don't want to change directions - against defaults of all sorts, as the credit crisis will affect everything, including industrials and consumers," he added. "Managers now want to know how to reduce the risk of sharp defaults."

Quant investing after the credit crisis: will it ever be the same again?
Tim Wong, CEO at AHL, said that the benefits of quantitative (quant) investments were an objective and disciplined investment approach; a transparent and repeatable process; the ability to process a greater amount of information; better risk management and diversification; low correlation with fund strategies ("although there is more of it with long bias funds").

The impact of August 2007 on quantitative management included a lack of liquidity in fixed income products; multi-strategy funds' liquidations of equities to cover losses and margin calls; market neutral portfolios' rapid deleveraging driven by margin calls and volatility.

The factors which underperformed at the same time were value (value investing is the strategy of selecting stocks that trade for less than their intrinsic values) and momentum (the rate of acceleration of a security's price or volume), which are popular among quant managers and simultaneously yielded negative returns in July and August. "This sort of things happens now and then," he added. "But why did it happen in August?"

The excessive leverage exacerbated the sell-off and more highly leveraged funds became forced sellers in August and consequently missed out on the recovery.

Source:
The Quants are back....


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