Inigo Fraser-Jenkins and Aaron Brown Debate The Future Of Quant Investing

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.

Tracy Alloway (0:15)

And I'm Tracy Alloway.

Joe Weisenthal (0:18)

Tracy, we're gonna have a debate today.

Tracy Alloway (0:21)

I know, it's our first ever Odd Lots debate. It's pretty exciting.

Joe Weisenthal (0:27)

I think we had one like a few years ago about like fiscal policy in India or something like that. I feel like we've had at least one before, but maybe not, maybe I'm hallucinating that.

Tracy Alloway (0:37)

Yeah, I don't think so. And this one is kind of on a topic that we've touched on a few times this year, but it's the terrible underperformance of quant investing in recent times.

Joe Weisenthal (0:51)

Yeah, exactly right. So for people who aren't as familiar, but as we've been talking about a lot, like a lot of traditional quantitative strategies, quantitative signals have only done so-so. So the most sort of obvious example is quantitative strategies that are built around value investing, identifying stocks that look cheap, buying them, shorting the ones that look expensive. Things like that, where you sort of like take a screen or some sort of method and sift out hundreds or thousands of stocks that always churn them.

Of various sorts, they really have not delivered the performance that they did in the past or that the performance that some of the academic work underpinning them would suggest would happen.

Tracy Alloway (1:37)

Yeah, and I think a big part of this existential crisis for quant investing, if you will, is that a lot of that underperformance could be forgiven in 2020 A lot of things have changed. There's been a lot of unexpected developments this year to say the least, but even before 2020, quant investing or systematic investing or factors such as value, however you wanna put it, they haven't been doing as well as one might have expected. So this is sort of a long-term decline and 2020 has really just hammered it home.

Joe Weisenthal (2:14)

And I guess the question is, and we'll get to this, but to me, the question is, is this like, are we waiting for the mother of all mean reversion? So you have years and years of underperformance for a strategy, and if you just hold out a little longer, then the big swing back towards historical norms happens, or is there something deeper and systemic such that maybe if everyone is engaging in the same strategies, or the strategies are well known beyond the universe of academics, they just don't work anymore, because we talk about the concept of alpha decay all the time, that if everyone knows a winning strategy, then it doesn't work as well.

So there sort of seems to be like two big questions, like which one is it? Or is it just a matter of like quantitative strategies could still work? They just need to be sort of updated in their approach.

Tracy Alloway (3:05)

Is it different this time? I have a feeling our two guests on this episode are gonna have different opinions on that topic.

Joe Weisenthal (3:11)

Well, let's bring in our two guests. I'm super excited about having both of them on. We're gonna be speaking with Inigo Fraser-Jenkins. He's a quantitative strategist at Bernstein. And last in October, he actually published a piece, an essay, and in it, he said, I'm no longer a quant. And he kind of had this big rebuke to the industry. So we'll get to his arguments why.

And for a different perspective, we'll also be speaking with Aaron Brown. He's a professor at the Math Institute at NYU. He's an author. He's a Bloomberg opinion contributor. And for a long time, he was the head of financial markets research at AQR, which is a big quant shop. So really delighted to have both of these guests on the show.

Inigo, thank you very much for joining us.

Aaron Brown (3:58)

Thank you for having me.

Joe Weisenthal (4:00)

And Aaron, appreciate having you as well.

Aaron Brown (4:02)

Thank you very much, Joe.

Joe Weisenthal (4:05)

So let's get started. Inigo, why don't you just give us, you know, sort of dramatic, and I have to say, you're kind of known for your dramatic statements because prior to blasting the entire quant world, you famously attacked passive investing is worse than Marxism. I think you came on the podcast and said, maybe your statements were a little overblown, but you certainly know how to say something provocative. So tell us why the sort of very high level view of why you think quant as we know it is busted.

Inigo Fraser-Jenkins (4:36)

Sure, I'll be happy to. And I wanted to kind of start off by saying that the essay wasn't really intended to be anti-quant funds per se, because the market is more systematically driven than it's ever been a year before. But I do want to kind of reject the canonical view of what kind of quant is and how it's used in the market. I think there are a few different levels to this. You know, there's one point that Tracy mentioned just now, which is yes, it's been an underperformance of quant funds this year. I think that's actually excusable, given the high correlation of stocks in the market.