Quantitative equity is going through a rough patch. Even though 2021 was quite successful, quantitative strategies are currently on the downside. Many people wonder if these strategies will work in the future and if they will use them as effectively as before.
There is more computing power than ever with unlimited data sources, but the question is, what aspects of these traditional strategies should we keep in the future? Quant equity strategy investing has been backtest-driven, making it a bit backward.
These strategies were effective in the past, meaning they have a bright future. All investment strategies go through difficult periods. However, we should look at these moments as an opportunity to change the process and adjust for better results in the future.
The current state of quant equity
Over the past several decades, the whole investment landscape has become very competitive. Many people have started using quant techniques, strategies, and factors. Several years have passed since all kinds of quant equity strategies have suffered, including those focusing on low risk, quality, and value.
Many people in the US have started wondering if these strategies are viable anymore. However, it’s vital to understand secular and cyclical challenges. Not all challenges have the same magnitude, and there are layers you need to uncover to understand the whole landscape.
Quant strategies have suffered because people have been using traditional factors and learning more about investment.
At the same time, there’s an argument that all factor-focused strategies ultimately become crowded.
This cyclicity can be linked to interest rates and the current monetary policy since they can’t be handicapped easily. Negative real and nominal interest rates have affected asset pricing. Since most of these factors are cyclical, many people have a positive mindset regarding factor-focused strategies.
The increased usage and power of modern computers combined with how known the secular challenges are have made many people wonder whether quant equity would be helpful in the future.
Many factor-focused approaches have decayed over time, and innovation is necessary to overcome these secular problems.
Many relevant factors for this type of investment have struggled in the past decade. Five of the top ten factors have been negative, but that doesn’t mean that these investments will become irrelevant in the future.
What can investors do?
With the use of quantitative analysis stock selection, we’ve determined that all quantitative investing strategies offer benefits, including high returns, meaningful capacity, and positive structural biases. This kind of investment isn’t for those investors looking to make money quickly.
These investment strategies are generally more effective over more extended periods. However, until you reach that positive point, your investment will likely struggle for some time. That frustrates many investors and tests their patience.
For example, values have struggled a lot in the past several decades as most real rates have been negative in developed markets. When quant investing is effective, a lot of capital is invested into these strategies, leading to increased flows and better returns.
However, the more capital you invest in a specific anomaly for profit, the more the profits will go down until “balance” has been established. Investors should focus on understanding proprietary and commoditized insights.
The future of quant equity strategy investing
The first recipe for successful investing is to adopt a process-driven approach with enough flexibility.
Key players and markets change at increasing rates, meaning that if your approach isn’t dynamic, you will consistently have issues with your investments.
It’s essential to distinguish between true risk premia and idiosyncratic alpha, also known as portfolio-focused strategies. That significantly affects performance expectations, trading volume, risk management, capacity, and investment fees.
Investors need to be forward-looking and consider how the future will look. Adopting a strict process or looking at specific signals can tell us where we’re making mistakes and how we can adjust for the future.
All investors have social media, trading strategies, research, data, and computing power that they can utilize to make better predictions and rationalize strategies.
Both asset and market values are crucial. Even though they can’t be priced accurately at any given moment, it’s essential to set in place an evaluation framework to use as part of the investment process. The value will always be relevant as it can tell whether or not assets are attractive.
Generally speaking, all quant equity investments are backtest-driven and backward-looking to a specific extent. Income challenges, massive technology adoption into daily life, changing demographics, and wealth inequality give opportunities to utilize the power of data analytics and develop new investment strategies for the future.
At the same time, investors now have the excellent opportunity to utilize third-party services that will help them comprehensively analyze different factors. They can get valuable insights to help them understand markets and make better decisions.