Quant investing post-pandemic: the state of play

Is the pandemic-induced ‘quant winter’ over for the investment industry? Many hedge fund managers now seem to believe a ‘quant spring’ has returned …

Quantitative investing, or systematic investing, encompasses a big variety of styles, markets and philosophies. But most involve adopting investment strategies that analyse historical quantitative data.

But, however good that data, it’s impossible to predict the future. Which is why the last two pandemic-ridden years have been described as a ‘quant winter’ (or as Man Institute put it: ‘a mid-life crisis’) for many fund managers.

Its success lies in its algorithms. They can react to thousands of trading signals they can rely on. They might be economic data points; up and coming global asset values, or real-time company news.

The worldwide healthcare crisis came as an unwelcome and destabilising surprise. This was in the same way as other macro-dominated events in the past. Think the 1998-1999 tech bubble or the 2007-2008 global financial crisis...

According to Refinitiv, COVID-19 dealt a ‘body blow’ to the quantitative model-based style of investing. Many firms using its value-investing strategies were negatively impacted, including two leading quantitative hedge funds, Renaissance Technologies and Two Sigma. Both registered unprecedented losses.

“COVID-19 presented a large shift in many of the market dynamics,” explains Amanda West, global head of Refinitiv Labs at Refinitiv. “Many institutions would have had to revisit a large portion of the models that they had to make them cope with what has been extreme market events.”

For many fund managers (FMs), that volatility meant being nimble and accepting the need for human overlay. Plus, acceptance that even with the best backtesting, there will be periods of time when certain strategies are not effective and the future will not look like the past.

Reducing exposure fast to hard-hit industries – such as aviation – came first. Then increasing it to those flourishing – such as the tech sector.

The big selloff wasn’t unlike what happened following the global crisis in 2008. But the wider economic shock of the economy’s abrupt closure meant quantitative investors needed to weigh in many more variables.

Yet, the pandemic tilt seems to have steadied now. Quant investors have now had the time to retrain their models. They have made enhancements towards how markets will react forward, post-pandemic. More are now also making greater use of alt data to provide value in their horizon scanning processes.

The result is that many quant strategists appear optimistic again that quant investing has rebounded – ready garner all its big strengths: consistency, reliability, cost-efficiency, easier predictions, and identification of outperforming stocks. 

A report by SigTech last autumn underlines this. It reported that 80% of hedge fund managers expect institutional investors to increase their allocation to quant strategies in the next 12 months.

Its survey questioned 100 leading hedge fund managers who collectively manage over $231 billion in AUM.

The majority (73%) said they believed that “the current economic and fiscal environment is attractive for quant strategies”. As many as 86% expected the number of quant hedge funds to increase over the next five years.

The ’quant winter’ has been a learning exercise for many.

It has shown that the best successes in process-driven quant investing in times of volatility require two overriding qualities: dynamism and flexibility (and the understanding that not all problems of the future can be answered in a backtest…).