Fundamental and quantitative investing used to be the hedge-fund versions of oil and water: They didn’t mix. Those in the fundamental camp do analysis the old-fashioned way, evaluating investments based on research and instinct, with humans calling the shots. Quantitative money managers turn to sophisticated computer algorithms that search mountains of data for hidden signals and then make rapid-fire investment decisions. A middle ground has recently emerged: "quantamental" investing, a merger of computer and human-based decision making. It’s not yet clear whether the whole is more than the sum of its parts.
1. Who is adopting a quantamental strategy?
Larry Fink’s BlackRock Inc., Steve Cohen’s Point72 Asset Management LP, Dan Loeb’s Third Point LLC and Paul Tudor Jones’ Tudor Investment Corp. are among the historically fundamental investing firms exploring or adapting a more data-driven approach in hopes of bolstering returns.
2. What exactly do quantamental investors do?
They’re typically fundamentalists at heart who borrow ideas from quantitative funds. They might hire data scientists to develop machine-learning techniques, which can then scour massive data sets for trends in order to better inform human stock-picking. Or they might use quantitative analysis to better manage risk. It’s a way of leveraging the power of technology and today’s flood of data to further the ability of investors in their bottom-up evaluation. Simple, right? But adopting it is not as easy as it sounds.
3. How did quantamental investing catch on?
While quants entered the industry decades ago, they began to pick up steam around the start of the 2000s while few were paying attention. Fundamental investors were caught flat-footed as the new breed of traders reaped massive returns by exploiting inefficiencies in the market. As more money and managers rushed in to the hedge fund industry, fundamental investors faced competition from their own kind as well as from quant funds, squeezing their returns. At the same time, computers became more powerful and data storage cheaper. Numerous computer-driven funds set up shop, and pure play quant firms like Renaissance Technologies and Two Sigma produced enviable returns. The lower barrier to entry and the success of quantitative traders spurred traditional funds to dabble in quant investing as a way to try to catch up to the techies and boost returns in the process.
4. How are quantamental funds performing?
The jury is out on whether these hybrid investing firms can produce consistently strong returns. Some firms experimenting with the new investing style, like Tudor and Point72, have posted disappointing returns of late. But hedge funds generally have a tough time beating the market during rallies, so it’s too soon to draw conclusions about the performance of quantamental funds.
5. Are the quants and traditionalists getting along?
Traditional firms experimenting with quantitative techniques are finding that hiring a new breed of employee and adapting new trading strategies is not a simple task. Fundamental investors can be protective of their turf, while quants brought in to juice returns might bristle at what may feel like a supporting role. The mixing of two different cultures can create conflict. Point72 and BlueMountain Capital Management have both faced bumps on the way to integrating quantitative researchers into their investing and culture.
6. Where’s this headed?
Depends on who you ask. Proponents of the hybrid technique say machine-learning programs, even as they improve, still benefit from having humans see the big picture and make the final call on investments. Others worry that a proliferation of trend-seeking strategies will produce diminishing returns. The idea is that there are only so many market anomalies out there to be discovered and exploited, so as the number of searchers increases, the more quickly one firm’s discovery will be duplicated by others, limiting profits.
The Reference Shelf
- QuickTake explainers on hedge funds, active versus passive investing, fintech and high-speed trading.
- A QuickTake Q&A on machine learning.
- Bloomberg Businessweek explored the rise of algorithmic investing.
- It’s been a difficult run for quant funds.
- A history of the hedge fund industry is in Sebastian Mallaby’s book, More Money Than God.