Querying quantity
The world’s largest asset manager by AUM in 2017 acknowledged a shift towards strategies run by machines rather than humans. However, fund selectors hold heterogenous views on the merits of quants strategies. InvestmentEurope reports.
When BlackRock announced in March 2017 that it was going to implement greater use of big data, related analysis and quantitative approaches affecting some $30bn in actively managed funds in the US, it reflected a paradigm shift being brought about by advances in technology and data sciences.
It suggests that the portion of the investment ecosystem turned over to machines will grow. Other examples highlight this shift too: Quantology Capital Management, based in Paris and previously named Uncia AM, switched from being a traditional longonly boutique into a quant boutique in September.
Julien Messias, co-founder, says such a shift is not without challenges: “The cost of data is very expensive, especially when it deals with high frequency trading. In addition to money, it costs time to clear the data. Low trading data is available at a cheap price but we spend time to remove inconsistencies. Inaccurate data can lead to poor investment decisions.”
PEOPLE STILL KEY
Despite the focus on computers, people remain integral to successful execution of quants strategies from a business perspective, he argues. And hence the importance of the ecosystem around the people.
“France is well-known for its quantitative engineers. Despite the attraction of London, Paris provides a stable fiscal environment that enables boutiques to establish themselves on the long term. However, in the quantitative management space, many are called but few are chosen. The presence of a seeder significantly helps the development of a quant-focused business.
“R&D is instrumental in the implementation of a quant strategy, it is more important than the execution of the strategy itself. More than systematic asset managers, we are researchers above all. That is why we have been labelled Jeune Entreprise Innovante (innovative young enterprise).”
Further developments could include implementation of artificial intelligence in areas such as M&A arbitrage strategies, he suggests.
“BlackRock’s move towards quantitative strategies at the start of the year demonstrates that the Anglo-Saxon market is at the forefront of the asset management industry. We see ever more assets flows going into the passive segment in the US. It is not the case yet in Europe because the economy is structured differently. Against passive, systematic strategies with low volatility and limited drawdowns like ours are a real alternative.”
The references to London and Paris are prescient: the French government has made no secret of its desire to persuade London based asset managers to move to the Continent in the wake of Brexit. Presumably, among those being wooed are a number of French nationals who specialise in quantitative strategies and who have eked out strong niches in the London financial ecosystem.
‘HOLISTIC CONCEPT’
Michael Wegener, head of quant products Equities and Fixed Income at Deka Bank, which recently launched a new quant fund range, explains that the German provider defines quants in terms of a “holistic concept”.
“We apply the term in particular in reference to data-driven processes and an investment approach based on a combination of theoretical and empirical insights. Risk management represents an integral element of this investment strategy.”
But he adds that while demand for quants strategies may be rising, they do not automatically imply transparency.
“From our point of view this really depends on the provider and the strategy in question. Since the recession, strategies have also become more complex, in some cases this increased complexity might give the impression of being more transparent. For us, a detailed and transparent illustration of processes has always been crucial.”
SMOOTHING TOOLS
Certainly, diversification and liquidity are cited as factors behind the growth of J. Chahine Capital, whose founder Jacques Chahine first specialised in financial data, including the launch in 1987 of a data platform called JCF Quant – sold in 2004 to FactSet.
Julien Bernier, CIO and partner, and Aymar de Léotoing, portfolio manager, explain: “Jacques Chahine launched the first fund, Digital Stars Europe, in order to implement certain ideas regarding quantitative asset management and to promote his financial data platform. His goal was to demonstrate that it was possible to manage a fund by relying on JCF Quant data for the stock selection.”
This year, inflows have taken AUM from €600m to €1bn as of mid- November, the firm reports.
“Market inflection points are a weakness of momentum strategies. When the market environment is changing rapidly, quantitative strategies tend to remain inert. Consequently, we have added smoothing tools to our momentum strategies that enable us to diminish the relative risk and get close to our benchmark when markets are heating up.
“We limit sectorial and country bets to 15% relative to the benchmark. We operate a turnover in the portfolio over 10 months. We therefore have a diversified portfolio that is representative of the trends seen in the markets over the last 10 months. We can carry biases sometimes.”
Bernier adds that the manager is working on quantitative approaches and asset classes with a view to launching new equity products relying on momentum, but possibly
also multi-factor and market timing approaches.
A GROWING SPACE
Research into artificial intelligence is set to take place in the coming year, but meanwhile Bernier and de Léotoing suggest that “there is room for fundamental and quantitative management but we stress that quants are getting more space than before.”
And still the launches go on. Paris-based asset manager Sagara Financière unveiled a quantitative strategy focused on European equity risk premia, the Sagara Europe Equity Premium fund, in September 2017.
Denis Gerber, portfolio manager of the Sagara Europe Equity Premium fund joined Sagara Financière in May, at the time the firm was established by chairman Fabrice Moullé-Berteaux, following the purchase of French quantitative boutique Day Trade Asset Management (DTAM) – founded in 2002 – from previous owner Adrien Fuchs last April.
Thus, quantitative portfolio development is also tied into the ongoing story of mergers and acquisitions in one of Europe’s biggest fund markets.
Moullé-Berteaux says: “Investors are more and better informed on quantitative strategies than before, but it is not certain whether they understand them better. Quants relying solely on algorithms and market signals are still perceived as black boxes by a number of investors. But if you have an active stock picking overlay in your fund, it is not considered as a black box.
“AI is only at its start, it generates lots of fantasy. I would rather consider it as a tool, an efficient extension of the human brain to support managers’ investment decisions. It will never replace humans. We should not hide behind machines.
“Research on algorithms is crucial in the success of a quantitative business. Algorithms in decorrelated systematic strategies cannot work for a long time. They need to be renewed as the nature of markets is constantly changing and we can only know it after these changes occurred.”
Henning Gebhardt, head of Wealth and Asset Management at Berenberg, says that his overall view of quants developments in the industry has not changed significantly this year. And, looking forward, he does not see why his view on use of quants strategies should change on the basis of people leaving London as a result of Brexit.
SELECTOR VIEWS
Susanne Bolin Gärtner, head of Fund Selection & Fund Trading Department at Folksam Fondförsäkrings sees quant models as ”very necessary in this environment”.
“For me, a quantitative model is based on certain factors decided beforehand in a systematic way. But, this alone can be quite dangerous; I still believe that you need the qualitative overlay with a fund manager who can actually question the model from day to day.
“We like transparent models, and that is difficult with quant models when you come to the details or the ‘Coca Cola recipe’. You have to have trust in the fund manager and the fund house to provide a quant model – and put in maintenance going forward – smart quant?”
Also based in Sweden, Jarl Åkerlund, owner of Trastebo in Sweden, and who previously spent over 17 years as a product portfolio manager at Nordea, suggests that understanding is critical when looking to quants strategies.
“For me a quant strategy fund can be a lot of different funds based on some kind of model. Because of that it is important to understand the actual model the fund is based on, which is normally not easy because sometimes even the people who set up the model don’t understand all the decisions the program does.
“I think it is a right decision from BlackRock because one key thing [regarding] quant funds is the cost; a machine can do it cheaper, and the cost aspect in the long run for the performance is very important.
“There is more to it than black boxes, but you have to get deeper into each strategy to understand what they do and that’s not easy. But as I said, sometimes it is just black boxes.”
He adds: “I think pure quants models, computer-based, cheap strategies will grow, but other quant strategies with high costs, mixed with some kind of managed strategies will decrease.”
Anders Möller, head of business/ chief financial officer at the Swedish Union of Tenants (Hyresgästföreningen) an association representing over half a milion households in Sweden, says that: ”quant strategies for me are (large) computers doing the normal fund managers’ jobs.
”For me, they are used in hedge funds and might do ok but according to what I read, do worse than humans… My picture is that it’s working well in many cases and periods but that it’s dangerous and not too good if the ’trends’ turn. Some quant strategies lost lots of money already in 2007. For us it’s no change (for the moment) on BlackRock changing its model and no change with relation to Brexit. We are agnostic so far on quant strategies. But we might have to change our view in the future.”
MACHINE STRATEGY
Irene Campos, general deputy director fine arts investment adviser at Inverdif Asesores in Spain, agrees with the earlier definitions; that “a quantitative strategy is that developed by a machine”.
“We can point to the example of the chess game played by Garry Kasparov and Deep Blue – an enormous computer built by IBM – in 1997, in which Deep Blue’s quantitative strategy defeated the player. Some years later in 2006, another chess battle took place between the worldwide champion Kramnik and the software Deep Fritz, again obtaining the second crushing victory. Investors should be aware that analytical hardware and tools like those previously mentioned are now within their reach.”
However, as Rafael Anchisi, head of Manager Research at Bordier & Cie notes: “We do not hold quantitative strategies, because they are also disturbed by the influence of the central banks over economics and statistical behaviour – not to mention their embedded complexity.”
François Pascal, head of Balanced Funds of Funds at Amilton Asset Management does invest in quantitative strategies, mostly risk premia strategies, and has done so for some time. But he too suggests that such strategies may run into challenging periods, which ought to serve as a warning to managers launching their own risk premia strategies.
“Is there still juice to be made? We look at niche asset classes but globally, you have one year to take profits in a niche asset class before the largest asset management players enter the space. When the niche becomes too fashionable, we tend to reposition our portfolios. Artificial intelligence is an interesting development in that space, one of the total return funds we are invested in is working on the issue.”
Hassan El Meouch, head of Financial Department at Astoria Finance also holds quantitative strategies on the buy list, having recently added five absolute return and risk premia funds that rely on algorithms.
“It is really something new as these vehicles start to be registered on the platforms of insurance firms we work with. We are confident in quantitative asset managers. In addition, France teems with high-quality quant boutiques like La Française IS or Eraam. The Echiquier QME and LFIS Risk Premia funds remain two of our plays. We are open to broaden our allocation to this type of strategies in our clients’ portfolios.”
Goran Vasiljevic, CIO and Member of the Management Board of Value Investor Lingohr & Partner Asset Management looks to art to help explain how he views the role of quants funds.
“A quantitative strategy for us means, utilizing the indisputable strength of the computer which is the consistent and invariably objective decision making as well as the transparent and reliable process unaffected of human misjudgment.
“Nevertheless, in our opinion, it is important to analyse the strength and weaknesses of both portfolio managers and algorithms and combine them accordingly. As Pablo Picasso put it nicely: ‘Computers are useless. They can only give you answers.’ We will continue to ask questions, and use computers to deliver answers, and thereby integrate our convictions and the resulting conclusions into our investment process – ultimately fusing man and machine.”
This article was first published in the December 2017/January 2018 edition of InvestmentEurope.
