Top Quant Analyst Rebukes the Industry: ‘I’m No

Longer a Quant’
bloomberg.com/news/articles/2020-10-05/bernstein-s-top-quant-rebukes-industry-i-m-no-longer-a-quant

Justina Lee

One of the most famous quant analysts on Wall Street has launched a stinging industry
rebuke as the pandemic thrashes systematic trades anew.

Inigo Fraser Jenkins is ratcheting up his critique of rules-based allocation methods,

calling them out for being over-reliant on backtests, diversification and mean reversion.

Strategies that look good on paper like value keep misfiring in the real world in large
part because systematic methods are failing to grapple with profound changes in the
global economy, says Sanford C. Bernstein’s top quant.

“If quant investing has to rely on such backtests and a diversified framework, then I am
no longer a quant,” the analyst wrote in a note.

Source: Bernstein

Systematic managers comb through decades of data to detect price relationships and
then apply those across large swathes of securities for trading. For instance, factor
investing is based on the idea that stocks with certain quantifiable characteristics
outperform.

Yet that approach has faltered for years amid growing doubts that those theories are
either junk to begin with, or have vanished with their popularity and a changing
economy. Now, the pandemic has deepened such woes.
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A Bernstein sample of U.S. quant managers has trailed their benchmarks by 3.3% this
year, compared to 0.6% of outperformance by their fundamental peers, according to
strategist Alla Harmsworth. Equity market-neutral quants have lost money on a one-,
five- and 10-year horizon, a Hedge Fund Research index shows.

The value strategy of buying cheap stocks illustrates the potential pitfalls of the typical
approach. Though low rates and working from home have fueled a boom in pricey tech
stocks, quants have doubled down on value because their backtests say cheap shares
must eventually outperform -- a costly bet this year.

Fraser Jenkins, who once called passive investing worse than Marxism, is hardly alone
in his criticism of traditional quant methods. Yet his latest missive speaks to the
existential crisis roiling the world of systematic managers.

Among the industry headaches are fast shifts in market regimes. As the government
becomes more active in managing the economy in the wake of the pandemic, mean
reversion -- or the return to historical relationships -- may take longer than ever.

Quants also tend to have more diversified portfolios, since they are counting on the
patterns they detect to hold over a large sample rather than insights about particular
stocks. That could be a problem in a world where equity leadership is increasingly
narrow. The average quant growth portfolio has 151 stocks, compared to 73 for
fundamental ones, according to Bernstein.

“For quants a confluence of high stock correlation, high factor correlation, narrow
leadership by mega caps amounts to a perfect storm,” Fraser Jenkins wrote in the note
published Friday. “Perhaps life is too short to wait for mean reversion?”

More Bloomberg stories on the challenges in quant investing:

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 Darkest Quant Fears Ring True in $1 Trillion World of Smart Beta
Fast-Money Quants Get Schooled as Markets Get Faster and Wilder
A $200 Billion Exotic Quant Trade Is Facing Existential Doubts
Is Value Dead? Debate Rages Among Quant Greats From Fama to
AQR

The analyst suggests practitioners incorporate macro views, apply their wits to ESG and
allow portfolios to be more concentrated.

All that would be a radical shift for an industry priding itself on tried-and-tested rules
designed for all-weather trading.

“I was hired by my current employer with

a job title that involved the phrase
‘quantitative strategy.’ I have come to the
conclusion that I have no idea what that
label really means,” he wrote. “The rules
are changing for investors to a degree we
have not seen in decades.”

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Inigo Fraser Jenkins

Source: Sanford C Bernstein

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