Quantitative investment strategies (QIS) open up a new frontier for asset managers. Through the partnership of rigorous financial research and advanced technical portfolio allocation techniques, investors can access diversified returns via empirically verifiable risk premia.
The QIS ecosystem is at an exciting phase in its evolution, and this report unpacks the variety of products gathered under this label and delves into how and why they can provide outperformance. It also analyses the means by which investors can access such strategies and the challenges associated with gauging their integrity and benchmarking their performance.
That QIS are attracting an expanding following is no surprise. Asset managers worldwide are under pressure to generate absolute returns at lower costs to their end-investors. Hedge funds are losing traction with this cost-conscious audience, yet portfolio diversification remains a pressing imperative.
QIS can provide the non-market correlated exposures traditionally offered by such funds through rules-based asset allocation mechanisms – rooted in well-evidenced financial research – at a fraction of the cost. Unlike the often Byzantine strategies embraced by hedge funds, the sources of returns generated by these products are systematic, meaning they can be readily explained to investment management boards. This in turn furthers effective oversight of the portfolio.
The report also seeks to equip the reader to navigate the growing QIS product roster. This is essential as, once an investment objective has been defined, tailoring an appropriate QIS solution requires a granular understanding of how risk premia derive their returns and the degree to which they correlate with the market. It’s also important to grasp the nature of their idiosyncratic cycles and the methods by which they can implemented.
Depending on the objective, an asset manager could choose a single or multiple QIS to replace their hedge fund allocation, or build up a portfolio of strategies with negative correlation to their existing equity and/or credit exposures. Virtually all goals can be pursued through QIS, but asset managers need to understand the capabilities and limitations of the available products before putting money down.
In addition, this report seeks to eliminate any misconceptions about these strategies by clearly laying out what they can provide – diversified returns over the long term – and what they cannot: alpha without risk.
It also includes profiles of a popular QIS vendor to break down the various stages of development that go into making an effective strategy, and a leading analytics platform that compares and contrasts different products.