Investors express lack of trust in quants

Institutional investors are sceptical about quant investment strategies, mainly due to a perceived lack of transparency, research shows.

Cambridge Associates said more than half of the 20 institutional investors it surveyed were still uncomfortable with quant strategies.

But the firm defended quant, saying these strategies offered lower costs and comparable returns when compared with traditional active management strategies.

Simon Hallett, co-leader of Cambridge Associates European endowments and foundations at the firm, said exchange-traded products formed one area where quants could both replicate and outperform human rivals at a lower cost, though discretionary managed funds were best placed for “longer term and more idiosyncratic investments”.

The firm’s research showed that median global equity fund fees for quant strategies were 55 basis points, which compared to 75 basis points for ‘fundamental’ human-managed investment strategies.

Investors traditionally perceive quants as being subject to high trading costs and at risk of crowding into the same investment positions and crashing. However, Cambridge Associates said quants use algorithms that can express the typical strategies used by active fund managers “very efficiently” without suffering from subconscious human biases, as they will not invest in anything that does not fall within the pre-set parameters.

Hallett said: “Quant funds should be seriously considered by institutional investors looking for similar returns to human-managed funds with lower fees.

“However it is clear that quantitative fund managers still have more work to do to market their funds and the benefits of them to institutional investors.”

It “may be true in a few cases” that some quants lacked transparency, said Hallett, but many could write down exactly how decisions were made and on what data.

©2018 funds europe

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