Leigh Drogen - Quant vs Traditional Investors and How Alphas Become Betas

**Patrick O'Shaughnessy** (0:00)
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Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

**SPEAKER_2** (0:59)
Patrick O'Shaughnessy is a principal and portfolio manager at O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

**Patrick O'Shaughnessy** (1:21)
I've often joked that this show should be called This Is Who You Are Up Against because I am so often having conversations with brilliant people across the investment landscape who are effectively my competition and yours. This week's conversation fits that description because it gives you an inside view into how things work among some of Wall Street's most competitive investment firms. My guest is Leigh Drogen who has worked as a statistical arbitrage portfolio manager and who founded and now runs Estimize, a data company which works with some of the world's largest hedge funds.
Our conversation centers on the massive shift from what we call discretionary portfolio management, basically stock picking, to a landscape that is increasingly dominated by quantitative investors of various types. We talk about how any investor might hope to earn alpha and how doing so is harder and harder. There are so many great stories in this episode told by someone with the perfect career experience to know how the system actually works.
After many episodes where I've been learning on the fly about topics like venture capital, permanent equity, or even health, this episode marks a return to my world of quantitative investing. I think you'll learn a lot and that you'll likely finish with an even deeper appreciation of just the type of investors that we are all up against. You can find show notes for this episode at investorfieldguide.com forward slash Drogen and now please enjoy my conversation with Leigh Drogen. All right, Leigh, well, I've been really excited for this one because I have intentionally avoided most discussion of quantitative investing on the podcast just because I've spent most of my 10 years my career doing this and I thought it'd be fun to branch out a little bit but I'm now ready to dip my toes back into the water and and we met very briefly at a I think it was a quant conference actually. I was standing talking in a bad favor and and we started chatting about something very specific which we'll get to in a minute but then I also came across a piece that you wrote on LinkedIn which I thought was one of the most thoughtful pieces on kind of the current state of the investing spectrum between traditional deep fundamental work and quantitative investors and kind of how that balance might look in the future and and that's really where I'd like to focus today because I think it is a fascinating shift that's that we're watching real time and that a lot of big people even famous people are being left behind by this move towards quantum.

**Leigh Drogen** (3:43)
Or they're simply opting out because of it.

**Patrick O'Shaughnessy** (3:44)
That's right.

**Leigh Drogen** (3:45)
So I'd love to start with what we were talking about at when we first met which was I said something to you like yeah you know we used to use this this IBIS data set and look at like analyst revisions and it totally stopped working as a factor and you said yeah yeah that was me I did that I was the one that hard that away so can you can you just use that story as a way of describing kind of your early career and and and background in investing and then we'll get into all the details yeah so I actually my my educational background is in behavioral economics and war theory I actually thought I was going to like Rand Corp CIA like State Department that route and it was interesting I got an opportunity to do an internship at a quantitative hedge fund between my sophomore and junior years and loved it and it was incredible and at the end of the summer basically I stayed in New York instead of going back to school and finished up at night at Hunter College here and that world was so interesting to me mostly because it's all just numbers and letters right you don't have to deal with the irrationality of people you just get to deal with like there's a variable and it's either correlated or it's not and if you can find that I think that correlation, and you back test it, and the out-of-sample works, and the p-values are good, you have a strategy, and you can make money, and it's all very straightforward. Look, it's science, and it's the difference between science and what politics is, which is not science. And the not science part frustrated me.