Leigh Drogen - Sink or Swim - How to Combine Quant and Traditional Asset Management Techniques

**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)
Several weeks ago, my conversation with Leigh Drogen on quant investing proved timely and popular because everyone in asset management is facing the rise of big data and the use of data science in investing strategies. Because of the rise of quants, many are asking themselves how to survive and thrive in this changing industry. In short, how can traditional managers compete with quants? This second conversation with Leigh was set up to answer many of the questions posed in the first one. If quants are taking over, what should other investors do about it? Leigh proposes a method by which old school asset managers can restructure their thinking and their process to compete with and even beat purely quantitative competitors. The method involves pulling the best from both worlds and combining them into a hybrid structure. But it will be impossible without a wholesale change in mindset, which is where we begin. Please enjoy this great second round with Leigh Drogen.
So, Leigh, round one was us describing sort of the state of quantitative investing and the process, broadly speaking. We're going to get even more specific today, which is to describe how a more traditional discretionary asset management firm, specifically Hedge Fund, can successfully make this transition from discretionary to at least part quant.
And we'll begin with something that is pervasive across this process that we'll describe step by step, which is this notion of mindset and ego. So I'll let you start there by describing what role ego will or will not play in this transition for those that are successful and why this needs to be first and foremost a shift in mindset versus say tactics and strategies.

**Leigh Drogen** (3:00)
Yes. So I started, it's funny that you bring up tactics and strategies.
I studied war theory in school and often we like to say that war is politics by other means and if you don't have a political goal, it doesn't matter what tactics and strategies you use to fight the war or to fight the battle, you're going to lose in the end. And as we've seen, you know, Americans in Afghanistan, like we've used all the right tactics and strategy, but we have no political outcome that we actually are attempting to affect.
And in the kind of long only and long short hedge fund equities world, it's very much similar today. So you're seeing all of these funds wake up and attempt to use tactics and strategies, but really have no kind of the political aspect has not really been thought through yet. And I think they're doing it all backwards. And the political aspect is mostly the ego associated with PMs having control over the investment process and final decision making and things flowing up to the PM instead of the PM basically just being like the offensive coordinator on a football team. That is the shift that needs to take place and look, these guys make a lot of money and even more like the power associated with it I think is an important thing for them. And in order to make this shift, they're going to have to give some of that up.

**Patrick O'Shaughnessy** (4:21)
Let's level set by talking about where it is now. So describe the, to the extent there is a process, describe the traditional process between researchers, analysts, sort of the hierarchy that exists now, how decisions get made and then we'll go from there into what it maybe should look like.