Friday, February 21, 2014

The Sociology of Quant Investing - Is There a Moneyball for PMs?

I attended a lecture given by a fund manager of one of the largest equity quant funds in Europe last night. The lecture was excellent: he addressed many of the criticisms of quant funds, and convinced me to a large extent that quant funds, which incorporate much of the newest (and old, but ignored) research on investing should play some part in my externally-managed portfolio in the future.

But another thing I couldn't help but notice was how extraordinarily young the manager was to be co-heading some of the largest quant funds in Europe. I asked whether quant funds were more amenable to young PMs, and if so, what was gained or lost by that fact.

His answer was generally, yes, quant funds are more open to having young PMs, for two reasons:

1) Quant investing, at least at the big shops, is more of a team process, relying on collaborative decision-making underpinned by a vast army of internal and external researchers. You rarely rely on superstar managers, so there's more chance for young managers to rise to senior positions alongside older managers.

2) As a result of (1), marketing for quant funds relies less on the manager's cult of personality (my words, not his). It's virtually impossible to market a discretionary fund headed by a young manager, but this isn't a problem for quant funds.

I thought that was very interesting. I see experience in PMs being valuable for 3 reasons:

a) Higher pattern recognition of cycles
b) Greater likelihood of having lost money at some point in one's career, and hopefully greater sensitivity to hubris
c) Larger toolkit & knowledge base

However, you don't want to overpay for or over-value experience (or conversely, penalize youth too heavily).

I'm familiar with the basic outlines of factors that quant funds try to exploit in equities. Is anyone running a quantitative fund of funds? I'm sure there must be, and see how that could be done quite easily with a mean-variance optimization framework (though I have my doubts about the appropriateness of that framework). More interestingly, is there a Moneyball of portfolio managers? If anyone has information on how this, I'd love to hear more about them. There's often a highly discretionary component to the identification of talented young managers. Most young managers striking out on their own seem to have built a track record internally at a larger fund - how do you judge skill vs. luck in these circumstances? This seems considerably harder than identifying growth stocks, which is in itself a highly speculative process.

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