The Power of Active Quantitative Strategies

  • Institutional investors anticipate that equity markets will be substantially more volatile in the next year, according to a survey of 200 CIOs and other investment decision makers.
  • Investors are likely to embrace activeequity strategies that are governed by well-informed investment hypotheses, that harness more diverse data sources and span a broader universe of potential investments.

Executive Summary

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 fivekey insights emerged from the research:

  1. Investors anticipate lower returns and higher volatility in equity markets in the year ahead, driven by 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 overdiversificationof active management can ultimately provide return akin to index strategies for active management fees, creating an imperative for investors to carefullyconsider the capital efficiency of their overall portfolios and to seek uncorrelated sources of alpha.

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The subject matter contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Neither Institutional Investor LLC nor State Street Global Advisors accepts any liability for losses either direct or consequential caused by the use of this information. This document is provided for informational purposes only and does not, in any way, constitute investment advice. State Street Global Advisors, which commissioned this report, is independent of Institutional Investor LLC.

All text and content of this research report are the exclusive property of Institutional Investor LLC. The research and commentary in this document are intended to highlight results, trends, and patterns among respondents in this study. In no event should the content of this reportbe construedto constitute an investment recommendation or managerial advice from Institutional Investor or State Street Global Advisors, which commissioned this study.

The views and opinions of the respondents are not necessarily those of State Street Global Advisors. Views and opinions are subject to change at any time based on market and other conditions.

January 2019

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Expiration Date: 8/31/2020