The Power of Active Quantitative Strategies
As equity-market volatility returns to normal levels, institutional investors are considering how they will adapt their strategies to cope with the potential for muted market returns. As noted in “Seeking Opportunity at the Top of the Cycle,” investors are likely to embrace active equity strategies that span a broader universe of potential investments and more diverse sources of data.
Investors are unlikely to move reflexively into active equities. Instead, they will use active equity strategies when — and only when — such strategies are governed by well-informed investment hypotheses. At the same time, investors recognize the promise of more diverse data sources and a growing toolkit of sophisticated analytics, including those fueled by machine learning.
This follow-up report examines how investors view active quantitative strategies as a means to navigate an increasingly turbulent market, and the concerns — both internal and external — investors have about using new investment methods supported by expansive sources of information and the next generation of analytical technology.
Survey Data and Conversations with Investors Reveal Five Key Themes
In survey responses and interviews, investment decision makers at asset-owning institutions such as pensions, insurers, foundations and endowments in North America and Europe revealed what they expect from equity markets in the year ahead, and what they desire in strategies as a result. The following five key insights emerged from the research:
1. Investors anticipate lower returns and higher volatility in equity markets in the year ahead, drivenby fundamental economic performance, continued trade tension, and monetary policy decisions.
2. In response, investors seek opportunity in a broader investment universe, including emerging markets.
3. One way investors plan on tackling upcoming challenges is by pivoting to active quantitative strategies that are based on sound investment hypotheses and supported by sophisticated analysis of diverse sources of information.
4. At their best, such active quant strategies deliver alpha by combining a larger and unbiased opportunity set with new sources of asset-pricing signals and highly disciplined portfolio construction.
5. Investors recognize the risk of forgone returns by having too many traditional active equity strategies. This overdiversification of active management can ultimately provide return akin to index strategies for active management fees, creating an imperative for investors to carefully consider the capital efficiency of their overall portfolios and to seek uncorrelated sources of alpha.