The Journal of Portfolio Management
Quantitative investment managers analyze mountains of data over time to find statistically significant deviations from the norm, and then devise methods to harvest returns as asset prices revert to the mean. Over the years, the field has become increasingly narrow and complex, but not necessarily wiser.
Quants’ shortcomings became painfully apparent during the financial crisis. This has driven many investors out of active quantitative strategies and into passive low-cost index strategies. For these reasons, we are at an important juncture in active quantitative investment management; to navigate it well, we must find how best to tap quants’ skills.
We envision a flexible and nimble investment approach, which we believe is more likely deliver performance success over both the intermediate term and the long haul. We see quantitative asset management turning to an eclectic framework that accommodates a wider array of possible outcomes and copes with the frequent occurrence of extreme events (fat tails).
The distinguishing feature of our approach is the recognition that investors must negotiate turbulent periods. Standard active quant models, which rely on static linear methods, will prove inadequate in such markets. We need models that dynamically reflect all portfolio risk exposures, not just those represented by typical conditions.
We urge active quant investment managers to look beyond bottom-up models and incorporate a dynamic, top-down (macro-driven) approach, one with the flexibility to capture shifts in risk and return expectations across an array of asset classes and market environments.
Quant methods can be highly useful when accompanied by qualitative reasoning. Given the extreme events that markets frequently experience, modelers must take seriously their responsibility to engage deeply.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees.
This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.