May 2009

FRANCE: Quant sums up French investors

Quant asset managers have come under fire for supposedly being pure number crunchers. But French investment firms argue quant will come back into favour – at least in France, writes Angèle Spiteri Paris France is known more for its art than for its science. So in a country where you would expect stock picking to be viewed as another art form, it is surprising that quant investing courses through the veins so strongly.

Perhaps the reason that this investment style, which is led by complex mathematical modelling, is so popular is due to the French love of maths. Pierre Sequier, CEO of Sinopia Asset Management, the quantitative specialist of the HSBC Group, says: “In the French education system there is a strong tradition and culture of mathematics and applied mathematics.”

He thinks this will bring back investors who, like their counterparts in other countries, fled from the strategy in the early days of the financial crisis.

Problems with quant surfaced because computers that were left to make rational decisions about what was a good investment seemed to backfire when a more human, qualitative approach was called for.

Alain Dubois, CEO of Lyxor Asset Management, says: “Everything that looks rational has failed. Quant is rational so it tended to fail due to the large amounts of deleveraging.”

But Dubois also says that quant has been a “winning strategy” that people chose to dump.

So is fear of quant due to a perception rather than a reality? French managers that use these techniques have particular views on why the method should not be dismissed.

Sequier, of Sinopia, says: “Quant actually covers a number of different approaches. You have the black-box approach, which involves analysing a lot of data and trading automatically using signals. These will be high-turnover strategies.

“But there is another category within quant, used by Sinopia itself. We start with the economic and financial theory and then use models derived from that fundamental basis. We actually try to be as disciplined and structured as possible.”

Guillaume Poli, CEO of Edmond de Rothschild Financial Services, says: “Quant methods can effectively deliver value, provided you are mastering them, and provided that the fund manager keeps an important part of active management to himself, meaning that you can unplug it on the defensive side.”

Edmond de Rothschild is an active manager; the management approach of its quant fund, called RFS Quad 4, includes both fundamental and quantitative research, says Poli.

“We started quant investing in 2006. It was a tough time to implement pure quant-based strategies. The manager of the fund, who had been at Crédit Agricole Asset Management for 15 years, became the head of asset allocation strategy, but he didn’t go strictly by the models. He made sure he remembered the fundamental-based strategies he had been used to. He struck a kind of balance.”

Poli adds: “There is still some degree of scare around quant investing; the fact that they depend on models is too risky for investors. People also want to see human common sense. Any product that we create or manage is designed to preserve capital while generating some upside opportunities.”

Crédit Agricole Structured Asset Management (Casam) also intends to strike a balance between quant and fundamental methods of investing. Laurent Guillet, deputy CEO at Casam, says: “We use quant as an aside, to manage some of our managed account portfolios. It is a type of portfolio management we offer, once a client has decided to do dynamic portfolio management. However, although the product runs though an algorithm, it is never completely automatic.”

Quant specialists also say that what investors need to understand is that a model-based investment process could mean that a manager is more accountable and transparent.

Sequier, of Sinopia, says: “We have a model-driven process to achieve our goals. Because the process is structured, we can explain how we make decisions in advance. In a given set of circumstances we know what type of decision we will take. We can also explain, ex-post, how we made decisions and what the impact was of each decision. From this point of view, in this period when there is a lot of demand for transparency, this approach is a strong advantage.”

Therefore investors should be advised not to throw out their mathematics books in haste and Dubois, of Lyxor, refuses to believe this crisis spells the end of quant methods. He says: “It is a very promising business. We believe in the quantitative side. Derivatives is our thing so we are competitive in this field. To develop these funds you need to create a lot of infrastructure and we had to develop a lot of it. We created our own stress-test systems and propriety methods. We believe it will pay off.”

But opportunities for quant may be limited to France itself. One quant manager says: “Quant is a difficult concept to sell to Americans and Anglo Saxons, but the French like their mathematics.”

©2009 funds europe

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