What It Takes To Win At Quant Investing

Joe Weisenthal (0:10)

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

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:18)

Tracy, you know what the funny thing is, is that even though it's been an incredible year in the stock market, I mean, just extraordinary by all accounts, as everyone knows, I feel like it's also probably been a frustrating one for a lot of investors.

Tracy Alloway (0:31)

Oh yeah, for sure. I mean, first of all, markets didn't really do what a lot of people, I guess, would say they should do rationally in the face of the biggest economic crisis in decades. But I feel like a lot of people just sort of missed various turning points in the market as well and are very, very frustrated.

Joe Weisenthal (0:50)

Absolutely. I mean, just super, super high levels of frustration. Also, even if you were along this market and sort of like generally bullish, the only way to have really won this year would be super concentration in tech stocks. And I feel like if you were underexposed to like a handful of tech stocks, which we could count on about two hands, then you're almost guaranteed to be sort of underperforming your benchmark this year, whatever it is.

Tracy Alloway (1:16)

Yeah, I think that's absolutely true. And of course, we've been talking about for years and years and years that the big tech stocks, fang, whatever you want to call it, are potentially overvalued. So it's doubly ironic that this year you would have underperformed had you not invested in the stocks that people say might be the most overvalued.

Joe Weisenthal (1:36)

Right, and of course, that is a big frustration to investors who have been waiting a long time for other sort of factors to do well. So investors like to talk into factors and the sort of the growth factor has done phenomenally well, but historically the value factor, so-called cheaper stocks, those have done well. And everyone keeps waiting for this turn or for other factors to emerge, whether it's value or low beta or something else, it never seems to happen. And if anything, this year did not prove to be a turning point in the market, but really just sort of an accelerant of it.

Tracy Alloway (2:12)

Yeah, I think that's right. I'm actually looking at a chart from Bank of America, Merrill Lynch, right now, and they point out that value's relative performance to growth was the worst this year since the dot-com bubble. So something to remember.

But we're not, this podcast isn't about value versus growth. Is it?

Joe Weisenthal (2:35)

No, it's not. But I think that the frustration that people probably have this year does lead to, people looking for other approaches to investing. And of course, in times like this, people wonder if maybe other sort of quantitative or algorithmic strategies, more money should be poured into them as an alternative to this ride where you just sort of buy the big tech stocks and hope that you avoid the turning point.

Tracy Alloway (3:02)

Well, I guess another way of putting it is a lot of the quant strategies are sort of momentum based, right? So if you can figure out where the money is flowing to, even if it's tech stocks, that might be a good way of investing in the current environment. If everything's about liquidity and following the flows, then quant investing or algorithmic trading, whatever you wanna call it, might be a good way forward.

Joe Weisenthal (3:25)

Yeah, but you know, backing up, it's like we talk about quant investing and the word quant gets used all the time and sometimes it's used to describe these super technical funds and sometimes it gets used to just describe sort of anything that has some statistical analysis in it. That term feels extremely vague to me.

Tracy Alloway (3:46)

Yeah, and potentially overused as well, right? Like everyone wants to seem like they are quantitative in some way or another. No one wants to say that they're investing purely on emotion and gut feeling and that kind of stuff. So quant gets bandied about quite a bit.

Joe Weisenthal (4:03)

So today we are going to talk with an expert who knows a lot about quant investing studies that can help us define it. And also hopefully sort of explain to us what it takes to win in this space. Because again, everyone sort of wants to be in this space. Even traditional hedge funds over the years have allocated more and more money to quant, to hiring PhDs, to building up their computer systems.

But what it really takes to win, and can lots of players succeed, is still kind of an open question.