Monday, 26 January 2015
Last updated 2 days ago
Aug 12 2009 | 10:24am ET
Actively managed quantitative strategies currently account for 9% of all U.S. equity assets under management, according to a new report by independent research firm TABB Group. Quantitative assets represent nearly 33% of total US equity AuM, up from 14% in 2000.
According to the authors of the report, Adam Sussman, director of research, and E. Paul Rowady, senior contributing analyst, the pervasiveness of quantitative methods throughout all global asset management strategies is undeniable and permanent.
“For many strategies and markets, automation is now a competitive necessity. Full or partial strategy automation will pervade the methods of global asset management in both alternative and, perhaps more notably, traditional strategies.”
According to Rowady, strategy automation has had and will continue to bring several dramatic consequences to the asset management industry.
“If automation can cause alpha to decay more quickly, then while automation is inevitable, the efficiencies gained by it may ultimately be offset by the cost of more rapid decay,” says Rowady. “However, since alpha discovery is still very much a manual process, the cost of discovery remains high.”
The TABB report—The Investment Assembly Line: Alpha Discovery and the Illusion of Automation—discusses the rise of quantitative strategies, the development of the tools to support those strategies and the application of those tools to a broader set of strategies.
It is automation, explain Rowady and Sussman, that has driven firms to develop and implement investment ideas more quickly, some more innovative than others. The competition caused by the fierce pursuit of alpha, they say, fuels innovation. One form of this innovation is the integration of tools to streamline this pursuit. As such, vendor solutions have evolved to the point where they are more integrated across congruent steps on the process.
The latest incarnation of this innovation is the all-in-one strategy automation platform – the investment assembly line. Developed initially in proprietary settings, but known primarily by its vendor-produced counterparts, the comprehensive investment assembly line marks a significant milestone in the evolution of the financial markets.
Comprehensive platforms clearly remove a massive amount of administrative burden that formerly weighed heavily on the productivity of quants. The question is whether this dramatic improvement in theoretical productivity has been washed away with the decaying half-life of many or most forms of alpha.
“It turns out that your proprietary tools can be both a blessing and a curse,” says Rowady, explaining that custom tools, like a custom-tailored suit, are designed to fit the organization “like a glove,” performing to the exact specifications required with optimal efficiency and speed, with little superfluous functionality to slow the process. “The downside of this benefit is the fact that all technologies – and software in particular – require constant care and feeding to update, improve and evolve.”
“While the road to increased strategy automation doesn’t guarantee success, it’s a road that must still be traveled,” says Sussman. “The current velocity of intelligence–and the margin of information arbitrage awarded to those with computational superiority–simply demand it.”
Jan 23 2015 | 1:00pm ET
In our new section, FINtech Focus, we will profile one of these firms each week. While fintech is a broad category, we will be focusing on firms that specifically cater to the alternative investment industry. Read more…