Why the Quants Aren’t Adding Up
Black-box investing strategies supposedly based on rocket science are vulnerable to a host of inherent biases, which are now being exposed.
Algorithms may not perform better than humans.
Photographer: Bryan R. Smith/AFP/Getty ImagesLike alchemists seeking to transform base metals into gold, asset managers are constantly seeking the perfect formula for investment success. In recent years, the search has focused on proprietary quantitative strategies, involving rule-based investments. The genre is ill-defined and marketed under different names, including factor investing, risk parity, smart beta and so forth.
Whatever the rubric, “quant” funds now have over $1.5 trillion under management. Index and quantitative investing account for over half of all equity trading, double the level a decade ago. But, after initial success, they’ve produced uneven returns recently — a bad run that may well continue. Arguably, the inherent weaknesses of the approach are now being exposed.