Giuseppe Paleologo on Quant Investing at Multi-Strat Hedge Funds

SPEAKER_1 (0:05)

Bloomberg Audio Studios, podcasts, radio, news.

Joe Weisenthal (0:20)

Hello, and welcome to another episode of the Odd Lots podcast. I'm Jill Weisenthal, normally joined by my cohost, Tracy Alloway, but she's on vacation today, so it's just me in this intro. But in today's episode, you will hear a conversation taped live at Bloomberg's Reimagining Information Forum on June 12th. We spoke with Gappi Paleologo, Global Head of Quantitative Research at Balyasny Asset Management. He has a new book out. It's called The Elements of Quantitative Investing. Neither of us have read it because it would go way over our heads because we're not quant, so we don't know how to read that stuff. But Gappi is great at explaining all of this stuff in clear English. So we had a great conversation and we hope you enjoy listening to it.

Tracy Alloway (1:03)

So just to begin, I'm going to start with a really, really dumb question, possibly. But isn't all investing quant investing nowadays? I mean, every investor has access to some form of quantitative.

Joe Weisenthal (1:14)

They're all using numbers.

Tracy Alloway (1:15)

Yeah.

Giuseppe Paleologo (1:15)

I guess, yes. End of answer, yeah.

Tracy Alloway (1:20)

So we're done here.

Giuseppe Paleologo (1:20)

I think so. I mean, pretty much everybody uses some kind of quantitative overlay, right? But to different degrees. So I have a friend who worked for one of the Tiger Cubs, and they refused to use Sharp. They refused to use logs in a spreadsheet because they said that they were dangerous. Probably they took the log of a negative number. So yeah, no, to different degrees. But yes, there is some quantitative culture seeping through.

Tracy Alloway (1:49)

Okay. So what defines quantitative investing? How would you differentiate that from, I don't know, value investing, discretionary investing?

Giuseppe Paleologo (1:56)

Okay. I think that there are several possible answers. So I'm going to go with one answer that I read in My Life as a Quant, I think it's a Wiley book. It's a very good book, by the way. And I think Cliff Asness defined quantitative investing as basically investing in a large cross-section of assets having a relatively low edge, low expected return in all of them. And so that's his definition. But it's not quite, I think, complete enough at this point, because you can also be a quantitative investor trading a relatively narrow cross-section of assets, but with high frequency, right? So what matters really is the number of bets, in a sense, that you are going to take, right? So I think that probably is, if you have a large number of independent bets or quasi-independent bets, this means that you need to be able to scale your method to a large number of independent bets. And this means that you are in some way a quantitative investor.

Joe Weisenthal (3:13)

Speaking of roles and jobs, Global Head of Quantitative Research at Balyasny, what's your job? You've been there about six months. What is the job until at a fund, at a firm like Balyasny?

Giuseppe Paleologo (3:25)

Okay, Global Head of Quantitative Research. Okay, so basically, I am the head of quantitative research for equities, and maybe one day in the future, I will do some commodities or fixed income, but I'm perfectly happy to serve equities, both discretionary and systematic. What we do is, I mean, my group mostly, I am in meetings, so I don't do any work. So we, in a sense, provide centralized quantitative services for the firm. So the first backbone thing that we do is, you develop factor models wherever you can, right? So for equities at different horizons, ideally you would like to develop them for other asset classes, but factor models are the backbone of a lot of quantitative investing nowadays. And then hedging at the firm level and at the individual PM levels, which is apparently very simple, but actually it's very deep as a problem. And then we do portfolio advisory services, which is basically you go to PMs, you help them construct better portfolios, you help them understand their performance, which is extremely important, manage their risk, manage their drawdown, on occasion be their therapist. But this is what we do.

Tracy Alloway (4:49)

I know you're in meetings all day, but if you were someone on your team, how would you be coming up with actual ideas for factors? I hear people who sometimes come up with ideas from Odd Lots episodes. Some of them have even turned out reasonably okay. But how does idea generation work? You sit down, you're like, I need to come up with a new factor today. What are you doing? What are you looking at?