Recent Decay in Performance of Many Quantitatively Managed Funds Attributed to Rising Correlations, Style Rotation, “Herding” Phenomena and the Activity of Hedge Funds, New Study Finds

Participants in the new Fabozzi-Intertek study commissioned by the Research Foundation of the CFA Institute attributed recent decay in performance at many quantitatively managed equity funds to rising correlation levels, style rotation and the fact that there are now more active quantitative managers using the same data and similar models. Specific to the problems many quantitative funds experienced in the summer of 2007, participants in the study attributed losses to the activity of hedge funds unwinding positions.

While alpha generation was identified by participants as the most important selling point for a quantitative fund, nearly three fourths of the study’s participants believe that it will become increasingly difficult for quantitative equity managers to find profit opportunities. The reason is that most models rely on similar predictive factors extracted from commercial data sets and academic models and therefore reach similar conclusions as regards investment opportunities.

For quantitative equity managers, the challenge is to add more and unique information. A recent development which even large quantitatively-managed firms are eyeing with attention is the hybridization of a fundamental approach with a quantitative approach. The belief is that outperformance can be obtained by commingling in-depth knowledge of a sector or a listed firm with a more disciplined statistical approach.

However, most quantitative managers and investment consultants that participated in the study are more comfortable with a pure quantitative approach that does not introduce judgement expect in rare cases such as before a big trade. In an effort to avoid being caught holding the same portfolio as every other quant (as apparently happened in the summer of 2007), participants said they will put the accent on identifying new and unique factors, employ new models, and diversity sources of information and data.

The study is based on conversations with asset managers, investment consultants, fund-rating agencies, and consultants to the industry as well as survey responses from asset managers. In total, 12 asset managers and 8 consultants and fund-rating agencies were interviewed. The survey results reflect the opinions and experience of 31 managers with a total of $2,194 trillion in equities under management.

The study is published as a monograph by the CFA Institute. To order or download a copy of Challenges in Equity Portfolio Management, see www.cfapubs.org/toc/rf/2008/2008/2

Survey Finds Equities Under Quantitative Management Up Over the Period 2004-2005

A survey of 38 firms managing more than €3.3 trillion ($4.3 trillion) in equities finds that quantitative methods are now managing more equity assets and driving more investment strategies than in the period 2004-2005. 84% of the investment professionals surveyed say that the percentage of equity assets under quantitative management at their firms has either increased with respect to the period 2004-2005 (25 out of 38) or has remained stable at 100% of equity assets (7 out of 38). The survey also reveals that a wider range of equity strategies are now being implemented with quantitative methods. Once used primarily in passive management to replicate indexes or construct enhanced indexed products, or in active management to control risk or rank stocks, quantitative methods are now being widely used to implement active equity and long/short strategies.

According to survey respondents, the most important factor contributing to a wider use of quantitative methods in equity portfolio management is the positive results obtained with these methods; the prevailing in-house culture is cited as the most important factor holding back a wider use of quantitative methods. The survey was conducted by Yale University Professor Frank Fabozzi and the Intertek Group. Survey respondents include heads of quantitative equity management and quantitative equity research at 38 asset management firms in North America and Western Europe. 63% of the participating firms are among the largest asset managers in their respective countries.

To download the Report, click here. 

Top 10 FEN Award of 2006 to Book Financial Modeling of the Equity Market

The book Financial Modeling of the Equity Market (Wiley, 2006) co-authored by The Intertek Group partner Sergio M. Focardi and Professor Frank J. Fabozzi and Petter N. Kolm of Yale University was named one of the Top 10 technical books of 2006 in financial engineering and risk management by Financial Engineering News. In commenting on the book, Richard Norgate, head of the credit risk management team at Barclays Risk and book reviewer for Financial Engineering News wrote, “The book provides an excellent overview of the models and processes used for measuring equity risk. [It] starts with a review of Markowicz’s 1952 paper on portfolio selection, before covering modern advances that have extended Modern Portfolio Theory. Later chapters move into equity price and index modeling, to modeling techniques for solving resultant equation. This book represents an excellent summary of the methods in place within equity modeling, and anybody wishing to understand this market could do much worse than start with this text.”  

New CFA Institute Monograph Trends in Quantitative Finance

The CFA Institute monograph Trends in Quantitative Finance coauthored by Frank Fabozzi and Petter Kolm of Yale University and The Intertek Group partner Sergio Focardi is now available. In presenting the monograph, Lawrence Siegel, Research Director at the Research Foundation of the CFA Institute writes, “[F]or quantitative methods to be used and appreciated in the investment community, one needs a primer on the topic for a nontechnical audience. The current monograph achieves this difficult goal. Its authors ... have translated the often highly technical jargon and mathematical language used by ‘quants’ into plain English... Fabozzi, Focardi, and Kolm provide an excellent and comprehensive survey of the challenges one meets in using quantitative methods for portfolio construction and forecasting. By covering a wide variety of methods rather than advocating a particular one, the monograph reflects an inclusive and thoughtful approach. The Research Foundation is very pleased to present Trends in Quantitative Finance. The monograph can be ordered through or downloaded from the CFA Institute website www.cfainstitute.org.

Top 3 FEN Award 2005 to Book The Mathematics of Financial Modeling and Investment Management

The book The Mathematics of Financial Modeling & Investment Management (Wiley 2004) co-authored by Yale University Professor Frank J. Fabozzi and Intertek partner Sergio M. Focardi was named one of the Top 3 new books for 2005 in financial engineering and risk management by Financial Engineering News. In commenting on the book, Richard Norgate, head of the credit risk management team at Barclays Risk and book reviewer for Financial Engineering News wrote, “I strongly recommend this [book].... The early chapters ... provide an introduction to financial markets and a summary of the milestones in financial modeling. The main part of this book is then a series of chapters covering the core mathematical areas useful to financial engineering, covering the basics of calculus, linear algebra and probability theory before moving on to stochastic differential equations, fat tails, continuous time models and everything else in between. If I’d had this book available a few years ago, it would have helped me start a career in financial engineering.”