Inigo Fraser-Jenkins and Aaron Brown Debate The Future Of Quant Investing

we've we've touched on a few times this year. But it's the terrible under performance of quant investing in recent times. Yeah, exactly right. So for people who aren't its familiar. But as we've been talking about a lot, like a lot of traditional native strategies, quantitative signals have only done so so. So the most sort of obvious example, it's quantitative strategies that are built around value investing, identifying stocks that look cheap,

buying them, shorting the ones that look expensive. Things like that, where you're sort of like take a screen or some sort of method and sift out hundreds or thousands of stocks that always turned them um a various sorts. They really have not delivered the performance that they did in the past, or that the performance that somely the academic

work underpinning them would suggest would happen. Yeah, And I think a big part of this existential crisis for quant investing, if you will, is that a lot of that underperformance could be forgiven in you know, a lot of things have changed. There's been a lot of unexpected developments this year, to say the least, but even before quant investing or systematic investing, or factors such as value however you want to put it, they haven't been doing as well as

one might have expected. So this is sort of a long term decline and has really just hammered at home. And I guess the question is and we'll get to this, but to me, the question is, is this like, are we waiting for the mother of all mean reversions? So you have years and years of underperformance for a strategy, and if you just hold out a little longer, then

the big swing back towards historical norms happens. Or is there something uh deeper in systemic systemic such that maybe if everyone is engaging in the same strategies or the strategies are well known beyond beyond the universe of academics. Uh, they just don't work anymore because you know, we talked about the concept of alpha decay all the time that if everyone knows a winning strategy, then it doesn't work as well. So there's sort of seems to be like

two big questions like which one is it? Or is it just a matter of quantitative strategies could still work, they just need to be sort of updated at their approach. Is it different this time? I have a feeling our two guests on this episode are going to have different opinions on that topic. Well, let's bring in our two guests. I'm super excited about having both of them on. We're gonna be speaking with Inego Fraser Jenkins. He's a quantitative

strategist at Bernstein and UH. Last in October he actually uh published a piece an essay, and in it he said I'm no longer a quant and he kind of had this big rebuke to the industry. So we'll get to his arguments why and for a different perspective. Will also be speaking with Aaron Brown. He's a professor at the Math Institute at n y U. He's an author, he's a Bloomberg opinion contributor, and for a long time he was the head of financial markets research at a

qu R, which is a big quant shop. So really delighted to have both of these guests on the show. Uh Indego, thank you very much for joining us. Thank you having me, and uh Aerin appreciate having it as well. Thank you very much, Joe. So let's get started, uh in Ago, why don't you just give us, you know, sort of dramatic And I have to say, you're kind of known for your dramatic statements because prior to prior to blasting the entire quant world, you famously attacked passive

investing is worse than Marxism. I think you came on the podcast and said maybe your statements were a little overblown, but you certainly know how to uh say something provocative. So tell us why the sort of very high level view of why you think quant as we know it is busted. So be happy to and I want to be can start off by saying that the essay wasn't really intend to be anti quant funds per se, because the market is more systematically driven than it's ever been.

Ye before, But I do want to kind of reject the canonical view of what kind of quantity is and how it's used in the market. I think there are a few different levels to this um you know. At one point that's but Tracy mentioned just now, which is yes, has been an under performance of quant funds this year. I think that's actually excusable given the high correlation of stocks in the market. That there's more tricky issue of the under performance of many quant strategies over last three

years or more, and that's frankly harder to explain. And that's even true for some of the more so new approaches have been applied rather than just those exposed traditional factors UM and linked to that, there's inevitably the question of the value factor that maybe we can come back to at some point, I mean, the discussion and van the whites end value is dead or not dead. But then are two deeper questions too. So one is around the world of diversification, and the quant strategies tend to

be diversified in two different ways. One is at a single security level and the others at the factor level. And there's plenty of really good reasons for this, because most quant models work on average rather than through high conviction and through tight risk control, and so when wants to be diversified. But the problem is that diversification generally speaking has counted against fund performance in recent years. That's

true not just the quants actually, but for fundamental investors too. Now, some parts of that might well be temporary, but I would argue that that in the regime where real rates are held are very low for a long time, that might be more a long run concentration in the market. Um. And the other big issue is this assumption that the future is going to be like they passed and I

applying back tests to making future investment decisions. Now, of course that's a really good way as a process for avoiding simply forming investment views by shooting from the hip, and I wouldn't want to advocate that. But equally, at the same time, I think there's an argument who made that the regime has changed. You know, if COVID doesn't counts the regime change, I'd struggled to see what would

counts regime change. Now, we have be very careful in you know, constantly overlaying discretion your views on models that are meant to be systematic. That process has a troubled past in many cases. But equally, you know, I think that there is plenty of evidence that occasional regimes do

change have been a very big way UM. And one particular aspect that now is a policy response to inflation post COVID and have that effective the formance of things like the value factor, but also just a mechanism of the interaction and macro forces and policy. I mean, I think we've been very used to a thirty year period where the main job cushioning the the economy of the business cycle and left to technocrats and central banks. That approach has been running out of ammunition for some time.

I think the future is very different. It's a blend of fiscal and monetary policy, a blend that inevitably has more politics in it um and a long runway UM and it's sort of messier and harder to forecast. And so in that kind of environment, I think we need to be very careful about applying back tests onto the future.

So there's clearly a ton to unpack there. I want to focus for now on the the point about narrow leadership by mega caps and that being a negative for quant factors that basically focus on diversification, or quant portfolios that focus on diversification. This is something that Aaron actually picked up in his response to your note you go, and he argued that, you know, people were saying similar things back in the late nineties nineties during the tech bubble.

They were saying it was different this time, and maybe investors should go out and just buy the really hot tech stocks. And of course we all know how that panned out. So, UM, Aaron, maybe just to begin with, could you dig into that that mega cap leadership point and how it relates to quants. Sure, thanks, Tracy. Um, we may not get as a vibrant to debate as you want. Most of the stuff I heard, uh going to go so far? Um. I agree with um, not all of it, and uh, you know it's uh a

little more nuanced than the headline of of his research piece. Yes, we have a technical name in quant finance for extended periods where the value factor underperforms, and we call them bubbles. Uh. The overvalued stuff gets more overvalued, the undervalued stuff gets even more ignored. Um. But but I do agree that this particular value drawed in we're seeing really goes back to the financial crisis. We have never in history and hundreds of years seeing a value draw down to this extent.

And I and and one of the ways I agree with UH and Ago is that I think the issue here is not in the numerator, but in the denominator. Whenever you look at a price, you're looking at a price, you know in dollars per share st market hasn't changed fundamentally in ten years. UM. The dollar has quantitative easing, near zero interest rates, UH, massive FED purchases, massive fiscal imbalances. I don't think those are I mean, those are some of the reasons that we're seeing that the dollar has

become different. If you do value factors using everything in gold, we find value is doing much better. I think that there is a fundamental process going on, and it is the market is awakening to the possibility of extended periods of significant negative real rates, and that's causing a lot of repricing in the market, and that makes the dollar a bad thing to value, a bad thing to use to measure value. So that's what I would say going

on there. I don't think we're in the mother of all bubbles in the sense that you're going to make a huge amount of money shorting the SMP five hundred or buying puts. But I do think we could see a extended period five years, ten years longer really mediocre equity returns. I think that is the risk to investors more than an immediate crash. So intego, I mean, how much of this really is just a macro question in

your view? And you know, this is again another thing that frequently comes up on our discussions, with lots of different guests coming at the question from different sort of intellectual frameworks, which is that, Uh, as long as we are sort of in this mode where the only like game in town, or the only sort of entity that stabilizes the economy is the FED, and the FED is sensitive to asset prices and doesn't want to see any draw down, etcetera, how much of this is essentially nothing

is going to work until we get out of this regime, this economics. Yes, so I think there are a blend of macroshies and microshies here. I mean not that I want to in any way claim that count investing is just about the values, but value does tend to be a large exposure in many quant approaches and certainly would help if value had to turnaround. And I think there are you know, in the debate that's gone on the last ten years around is value dead or not dead? Um?

And I said a view that is not dead ultimately, but equally I can see that there are headwinds for it, some which macro and some which a micro. So you know, I guess some of the more micro headwinds are around the technology change, destroyed moats around certain industries, uh, and the change in the basis by which corporate make investments more than intangible assets rather than tangible assets, and so

something the measurement of value has been wrong. But one thing has been clearly missing, I think, and that is inflation. And you can show that of the last five years on daily data, the last ninety years on quarterly data, that period and inflation picks up tend to be generally can the good ones for value. And so in a sense you to say, well, we're waiting for a policy

shift here. And I happened to think that once the immediate doest settled and we're out of our short term deflationary shock, then actually the policy response to COVID is going to be inflationary. In a sense that is part of what value investor is waiting for a long time.

But with the enormous caveat. But I think there are plenty of good reasons why the policy response to that inflation when it comes will be different, and so there's I think a likelihood as I mentioned that real rates are held low for a long time, and what that leads to I think is something of a bifurcation and the value factor, where if value is an undervalued sickle company, then find it can respond and do very well and

rebound a mean reverting that kind of environment. But the value is a financial company, then it's much less likely too. So if we're relying on simple baccess and what value does inflation environments, then I think it might be be disappointed, but more nuanced approach actually could potentially find some areas of value that outperformed. The problem is that it requires overlaying a regime policy view, which happens to be a

subjective discretion we kind of core um. And the other thing I'd say linked to that is I really really

want to be able to believe in MIANA version. I mean because without because with that MENA version, we're left relying on forecasts and huing things are not tertally good at making those um and in a world where I would argue that actually all asset classes are pretty expensive, you know, equities, credit, sovereign bonds, private equity, maybe the value factor is the only cheap thing that we can

go and buy. The problem is that the way the goals are phrased in the industry, and the way the people think about their personal career risk, which can't be hedged away. You could be wrong for a period of time that makes almost impossible to hold it. And although the engine of mean version might look like it's very strong, we also do know that policy can simply override that

for every long period of time. So I have a follow up question based on that, which is I mean you ago you sort of touched on this in your first answer, But one of the reasons people like quant investing or systematic investing is that you sort of avoid that shoot from the hip style of investing, where people can sometimes I guess, become too reliant on their gut feelings or irrational in one way or another. So should quants be attempting to factor in these kind of big

macro calls into their portfolios. I think we need to be very careful about adding a continuous series of discretionary overlays onto what are meant to be systematic approaches to investing. And the fact is generally the shoot from the hip approach to investing, I think is going to struggle in a structural way. Frankly, in a world where there's so many cheap, semi passive ways to go and buy things used to be thought of as active, and I'm thinking

you have sort of so called a beta strategies. Um, that's very hard to have an approach that you know, the only reminds on that. Having said that, occasionally, I think there are huge regime shifts that do take place, and I think this is one of them. I guess most obviously UM in the policy environment and the way the policy interacts with the market overall. En sure regime shift is a nice sounding term for this time is different, and quant is really based on the idea that sure

things do change, but people overestimate the change. People overreact to the last six months, the last three years, the last ten years, and if you look at things over centuries, if you look at the same factor in many different markets, and context, and you stick to that. You're not right all the time, but you're right of the time. If you go with whatever is popular, you're basically never right. UM.

And there are regime shifts in our day. It we have the transition from gold standard defeat money in nineteen seventy, we have the broken breaking of inflation in nineteen eighty two. Going further back, we've got World War two, the Depression, World War One. So we've seen regime changes before. They're in the data, and there's no reason to have a

special way to deal with them now. Really, we've been talking about quantitative factor investing in US large camp equities, and that's that's one part of quant There is a whole quant macro UH strategy UM that is trying to take advantage of these macro things. You can be macro and still be quant you know, speaking of regime shift, uh,

Aaron and Nego sort of hinted at it. I mean, you know, one of the things that strive to me I think about sometimes is you know, a lot of what was once UH sophisticated strategy is now like I can go into any online broker and quickly with a few key strokes by some sort of so called value e t F very cheaply. That used to be something that you know, powerful people of powerful computers and hold teams of traders had to do now super simple. Is that a regime shift? And is that a contributor to

the alpha decay of some of these strategies? That the ease with which sort of anyone can replicate them. We don't need a whole team of geniuses. It's say an a q R to do them per se. Yeah, well, um, and about the geniuses, but we have a lot of degrees at hqu are No, I don't think so. For one thing, when more people pilo in, it tends to strengthen the strategy. Right, if everybody is buying value stocks and values going to value stocks will do well. If

everybody is doing momentum, and momentum will do well. The problem comes when people change their minds. But also this is just a natural way of financial markets. You know, you start building a hedge fund strategy, you know, with new assets, with new ways of doing things. But then as you get better at it, as more people learn about it, as liquidity improves, Uh, it becomes a beta product that every retail investor can buy an et F forms. We should all be very happy about this. It is true.

One of the downsides of doing cutting edge financial research is, you know, you don't get rich forever. You have to come up with a new idea every uh well frequently, basically constantly. You have to keep them, you know, improving your ideas and coming up with something new because the basic product becomes generic very quickly. But I'm to agree with Aaron. I don't think just because money has gone into alex cool and smart be two factors that it

undermines the efficacy of the factors. Um, yes, okay, to are examples perhaps of of apparent inefficiency in the market, to have too much careful invested them and then they stopped working. But I think there are plenty of the reasons and why. But the slight value factors in the markets do have some long one efficacy behind them. And also it's a practical point if you look at where money to be invested in smart beta e t S, at least of that is indexed to the US market.

But the apparent lack of performance in value is something that has been evident in European markets and to some extend nation markets has done blessed well to in recent years. I think that what's more interesting is this question of what that does for the goal of investing. And it's basically shifted the alpha beta boundaries somewhat. So on one hand you can think about as being a pain for

an active manager to just raise the bar. What they have to do is not just enough to beat the market, but now they have to beat the market and value and quality and low foal and momentum. But equally, I'll argue, actually, ultimately good thing. So it makes it very clear what the true goal of act investing is. It's a generation of idistancretic alpha, and if you can do that, it goes to the heart of why people should a premium

for an active fund. One of the topics that we've been talking quite a lot about it is value investing, of course, and whether or not if you did value investing in some different way, for instance, by including intangibles in book value, whether or not that particular factor would look a lot different and maybe be even brought back

from the dead in one way or another. I'd be curious to get your views on value investing specifically, is there a way to resuscitate that strategy, and what does um A new regime shift if there is one, actually look like, well, thissten's aaron um. Adding intangible assets I think would not be a good idea. That's that's kind of sticking opinion into what should be a quantitative measure. There is active research in the value factor, and we

shouldn't talk about it like it's dead everywhere. The large cap US equities yes, European equities yes, other equities not so much. Commodities no, in test rates no, real assets no. So so value is still working many places, um, but there is very active research. As I mentioned earlier, most of the focus on the research is not on the assets,

but on the dollar. You know, it's the dollar still a valid measure of value, of value of a valid thing, and measure value in on my side, I you know, I think that there are headmand as the value factor.

You know I mentioned sum early on. You know this idea that some set there's a lots of offensive motor around them, and so their value not just because of a a passing higher risk premeum attached them at some point a business cycle, because the structural problem is also the apparently monotonic move down in rates has kind of messed up the process of UNI version as well. But as I said earlier, I think that one thing that's clearly been missing is a macro force in the form

of inflation, and probably not plausibly the first time. Intend I think that's a good reason to think why inflation kind of could materialize, And so the idea of finding you know, cyclical undervalued companies which fundamental or quant research implies, and not going bankrupt through the kind of COVID kind of period um, they should respond very well indeed to an uptick inflation you know that occurs on us a one year for the horizon, and the whole binds of

policy tools and goals of policy that have changed to make that a relative possibility. I think in a way that but that it wasn't before. So I think that there could be a partial macro resuscitation of the value factor. As I said, though that implies a split though of value perhaps working in in course cyclicals in in in commodity stocks were probably not in financials um and then so so some structural headwinds are there in the background, but I think such I'm some of them come be

resolved as well. So we start this conversation or debate about quant investing and then, not surprisingly, it ends up turning into a debate or question about value investing and when it's if it's dead, Which oft of these discussions do? Why not just look for other stuff? Why this sort of like you all this research and to value investing, it's value investing dead, etcetera. Why not just move on and find some new factors, find some new find some new dimensions of quant and UH sort of leave this

debate behind. Well, of course people are doing that and there are you know, arbitrage is good, Momentum investing is doing very well. But value is fundamental to quant. You know, the day quant gives up looking for real economic value in things, UH is the day that it just becomes another form of technical analysis. It is very difficult for me to imagine UH, you know, robust quant UH investment

management business that doesn't have at its core value. You know, there's all this other stuff and it's great and it has great returns. I mean, it has great properties, but if you remove value from it, you have no anchor. We agree with that, and that at least for the the vast majority of quant approaches, we have investment horizons that are we're measured in quarters or longer. It's hard to imagine not havn'ting, but not having some kind of value

anchor in that. Of course, it's been a a huge um an investment of time and dollars in trying to discover new factors. I mean, I'm skeptical of extent that that is a worthwhile activity, but I think that certainly at least applying uh same machine learning techniques to extracting data that we didn't have at our disposal ten years ago at least seems like a worthwhile thing to go

and try. But equally, there's a danger there that one ends in a sort of sort of I T arms race, trying to discover new factors before they're are petraged out in the market. So that can certainly work for certain business models. I'm not so sure that um that as yet. At least there's evidence that can work for long horizon and for a mass market approach. But one thing I would say is that if we, you know, think about

what else quant can do? You know, and yes you can be more than the value factor, but it could be more than just thinking about new factors as well. You know, I think the one of the you know, kind of key questions that interests me is where can

progress really be made in finance and investing. I mean, I think it's hard to argue that progress is really made in how you make directional investment decisions, in the sense that given a view on the security now is unlikely to be more valuable than similar view arrived at several decades ago because markets more efficient. Likewise, it's hard to innovate, I would argue in a more kind of

theoretical sense in finance. But where progress can be made I think is on investment process, and there they can actually be a series of incremental improvements over time that are not things that simply arbitraged out by the market. So things I had in mind might be the process of portfolio construction, how that's applied to a different kinds of ways that author's generated. Well, also the way the

goals are set. Frankly, I think it's a huge issue for the pension front and a Dowmond industry at the moment just to think about how they set long one goals and how they then use those to issue mandates to fund managers, and those are things that actually can be improved on incrementally over time. And there's no reason why quant can't be brought to bear to help with

to help with issues like that. So, Aaron, you mentioned this idea that the dollar might not be as valid as it once was as a way of actually measuring value, and that that might be part of what's going on here. I'd be curious on that last note that Intego made about actually improving the investment process. Is there anything that investors could do when it comes to the dollar or

how they're incorporating that into their portfolios. If you're a U. S Dollar US citizen, you know, run your affairs in US dollars, it's pretty hard to ignore that. But I would argue the biggest investment risk if you're looking, you know, will I have enough money to retire in ten years or something like that, You really have to think about what's the dollar going to be worth? Um? You know, what's a tax regime going to be, what's the inflation

regime with purchasing power? Will you know, Libra or bitcoin be the mode of transaction at that time? Um? Will the law allow you to spend your money? The way you want to spend it. Will the FED have bought so many assets that everything you want to buy you have to go to the FED to buy a loaf

of bread. You know, we just we have huge uncertainties about that much more so I would argue that you know, what's the some PEF hundred going to be in UH, you know, real economic terms, which companies will be profitable and so on. I don't think that's really been true that level of uncertainty about the US dollar. You have to really go back to maybe nineteen seventy, in the nineteen seventies to think about when when you know the risk of the currency was greater than the risk of

the equity market. I want to go back to UH. And you know something you said both of you made this point, but this idea that historically, speaking empirically, it suggests that periods of a greater inflation, which is possible that well you have in the post COVID UH period. But I think that's highly TBD have historically been um better for value investing or the value factor. Is there

an intuitive reason for that? Like what we can talk about regime macro regime shift leading to quant regime shift but what's the sort of logic behind or why should

we expect that to be the case? I mean, on my side, um, I see these one part of that reason as being you know, essentially a signal of of of way on the business cycle and the ability of certain kind of corporates to raise prices um and an equities being in the main real assets, but the but in the benefits, but that certain corporates can get on that.

So normally those are those upswings and inflations a signal assigning of macro regime change or but the other way, you know, if there's disinflation as we've seen you know, the last ten years, and every episode of of higher risk of this inflation tends to be signaling a cychnical risk um and a increase in risk aversion which tends not to be good for value companies. That's so much

high inflation as inflation uncertainty. If you hit a consistent six percent inflation every year and everybody knew it, I don't think it would be matter very much. But the fact is, you know, if you just don't know what inflation is going to be, if it could be zero percent, it could be twelve percent um that makes value hard

to measure in dollars. Mm um Eron, you said, so they want to go back talking about value x equities, which is something that I haven't heard that much discussion of because in my mind I have this sort of like intuitive sense of what it means to find value with inequities, whether it's some measure of assets or earning his power. But talk to us a little bit more about value approaches or quant approaches outside of the traditional equities realm, and what really that means and what what

what's pursued there? Sure, Uh. Well, one one classic quant strategy, of course is to borrow money and low interest rate currencies and UH invested in high interest rate currencies to earn the carey spread there. But you need a value uh overlay in that to protect yourself against hyper inflating currencies, currencies where the high interest rate is really illusory or countries where the low interest rate is is an illusion

due to currency problems. UM. In commodities, people do uh, you know, analysis of supply demand, actual use value of commodities and use that as a quantitative way to decide which which commodities are over and undervalued. Real assets, real estate forestry minds. Things like that people do the same strategy of buying cheap stuff and shorting very similar, highly correlated expensive stuff. Doesn't work all the time. Time again, you know, with all these quant strategies important to emphasize.

You know, they work fifty one percent of the time if you're lucky, if you get it right, and you have to be very uh. You have to be rigorous about containing costs because you don't have a huge amount of alpha. You don't have the kind of alpha where you can just run out and buy the stuff you

like in short the stuff heedlessly. You have to watch prices very carefully, keep your costs down, and you can eke out um you know, a hundred basis points two hundred basis points a year with very low volatility, and therefore you can combine a bunch of these strategies and leverage it up and make a nice safe return most of the time. I think that cross asset angle is actually super important. I mean, I end up, I say, you really thinking about Okay, So there's been this recent

problem with traditional quant strategies. You know, everyone's running the quant approach, the welcoone look to see as some competition can growing market. And I think that probably the big the problem in investment right now is the problem of saving for retirement and the idea of how an earth pension plans are going to be able to preserve purchasing

kind of the long run. If we end up in a world where the cross asset return of traditional asset classes is low and inflation goes up, it's a horrible combination which really I think upset the horr a time and model that's been in place for the last for thirty years, and even potentially challenges with the idea that you can hand on retirement risk to individuals. And so I think factors have to play an enormous role in that.

And so I there's an interesting angle for a kind of quant to you know, think about perhaps a slightly

a different kind of kind of client base. I I see some quants already there, but in a world where asset class beatas are going to be lower and also frankly not off enough diversification amongst themselves, then I think there is potentially quite a big bid for thinking about the factor type strategies within strategic asset allocation in a much bigger way has been attempted historically Austin that the trouble with that is we don't see a huge correlation

among you know, if value is not working very well in US stocks, that doesn't tell you very much about whether value is going to be useful in commodities. We played a lot with trying to do factor based asset allocation, and really it's hard to come up with anything better than risparity. Uh, you know, the correlations are too uncertain. The factor correlations are no better than the gross uh

you know, rock correlations. Um. So I don't I don't disagree that this would be very useful if somebody could do it, But until somebody can beat risk parity consistently, I don't see there's much value here. Yeah. Well, I mean, so you mentioned risk parity, and it's not quite the same thing, but it seems like in many cases it's a more advanced version of you know, the sixty forty portfolio in many cases is and there's so much talk about that being dead because the bonds component of a

traditional diversified portfolio. In theory, treasuries don't have that much more to rally of interest rates in the US don't go below zero like is are these Are you worried Aaron about like these sort of like basic bread and butter portfolio allocation strategies because it seems like intego is and I'm curing both of your takes. But um, are you concerned that the sort of like what's sort of simple and has worked for a long time could be coming to its end just for sort of mathematical reasons

like that? Well, let mean, you know, never worked, never had any theory behind it, was never a good idea. Risk parity is is considerably more Okay, Yeah, people, people have been saying bonds are dead for really as long as I've been in finance, but so for you know, they've they've outperformed other asset classes. I do believe there is a significant possibility in the future of sustained periods of imificant negative rates, meaning treasuries could do very well.

But I also agree that it's uh, you know, you have to consider the fact, you know, is zero really important? Is there are a reason? You know? And in the basically most uh you know, most risk parity allocations would have something like a quarter of the risk allocated to major market major currency interest rates. Um, you know, is there a reason to look for other investments within that

bucket that might give a better return. I'm certainly not ready to say you should do that yet, but I know a lot of people are looking into that, and it is a little scary buying minds at zero percent.

So having had this conversation, I feel like there's actually a bit of a consensus forming, which is that quant investing might change in one way or another, but in another way, the demand to systematically invest in assets, whether it's a single type of asset or cross assets like we were discussing earlier, is probably always going to be there, and it's just going to change in shape and form.

And the thing that really reminds me of is, you know, a few decades ago, no one would have thought that low volatility would be a desirable thing, and yet nowadays we have all these low volatility e t f s and products and factors and things like that. Is that where we're heading. Could you maybe give a summary of what quant investing is going to look like in say, five or ten years. Is it still here but it's

just changed in its nature? Why don't we start with indigo? Um? Okay, yeah, I think the way heading towards a world where there's no one kind of canonical view of what quant investing actually is. Is the first thing I'd say, I can

imagine a number of routes to being explored. So one would be an area where, in fact, but there ceases to be a distinction between a quantum fundamental invest and so for example, you know, if in the future an analyst forming a view on a single stock happens to form that view via a model that's written in Python rather than an Excel, you know, is that a quant

model or fundamental model? Well, I don't really know. I don't really care frankly, um, but you know, it ends up with a kind of blending of quantum fundamental approaches. So that's one possible route um, you know, I think there, you know, will be a further attempt to make kind of traditional quantum approach is going to work in a

turning value and it would help with that. I think there's the possibility of exploring quant approaches which are less diversified and have longer holding periods, which is an uncomfortable area for quants to be in for all kinds of good reasons. Be equally, you know, I think that's there's something that kind of could be explored. UM, there's the potential of applying a new techniques to new data sets.

I said, I think that is something that will continue to be a huge interest, but I think probably as a commercial proposition, something that's only relevant probably for a small group of asset managers. And then also, as I mentioned, you know, just using factors embedded as a way to try and solve a long on pensions problem through strategic

decisions and allocations to them. UM. I would say that, you know, if we define quant broadly as any kind of systematic investing, and that's you know, that's clearly only going to grow. It will become more machine learning and artificial intelligence dominated. UM. But I use quant a little more narrowly. I mean sort of the current academic and

professional consensus around kind of mainstream quant ideas. UM. If these ideas were somehow overthrown, if they stopped working, people would not go back to you know, looking for the next war in Buffetter David Ironhorn for you know, looking for individual loan geniuses that can't really be scaled. They would look for new systematic want method I think that the basic academic quant consensus is pretty safe for the next ten or twenty years. There is always research. It's

always evolving. You know, it looks may look the same if you're you know, from the outside, but having been in this industry for decades, it uh, you know, it changes enormously. The research is going on. But some fundamentals like value, like momentum, like quality, like low volatility. I think those are those are going to be there. They may be interpreted by machine and and and no individual human can understand them. Uh, they may be marketed and

pitched in different ways. There will certainly be improvements and how they're measured and how they're exploited, and as Intego is emphasized, how they're constructed into portfolios. One thing we haven't really mentioned is even the most sophisticated quant shops tend have very crude ways of forming portfolios. You know, you do a value you go along thet of stocks that are most undervalued and go short to their percent that are most overvalued. Um. I mean it's a little

more sophisticated than that, but it's not. There's nowhere near the amount of sophistication there is in measuring these factors. You know, risk parity. You just wait, everything can inverse proportion to its volatility. You know. That's those are pretty crude uh techniques, So I suspect there will be a lot of uh improvement in those, But I I have

faith in the basic quant out look. I think the same people who are successful kuant investors today, if they don't retire, will be successful kuant investors in ten or twenty years. Well, uh, that was really awesome. I really appreciated both of your perspectives. Intego Frasier Jenkins at Bernstein and Aaron Brown, longtime veteran of the industry, author and professor. Thank you very much, both of you for joining us. Thank you. Thank you. Joe and Tracy and in Ago,

thank you. It's so funny, Tracy had, like so many of our conversations all end up being about the same thing these days, and even when we start with like, oh, this is a different topic than this, it sort of all comes back to the same thing. But actually, yeah, yeah, I was also thinking that was such a polite debate, you know, I was hoping it would sort of descend into a drama and a shouting match, and at some point, like Inigo would say something like you killed my factor

prepared to die or something like that. Um, but we didn't really get that. It felt like there was a sort of underlying consensus, which is that investing as we know it might die in one sense or another, but it's not really going to leave in the wider sense, and that instead it's probably and the morphin evolve along with the broader macro environment. Yeah. And I guess, you know, like as I was saying, like so much ends up

coming down to this question. And I guess it's empirically the case with the success of a lot of quant factors of whether we get a change in the macro situation, and the macro situation doesn't seem to be so much about growth or recessions or whatever, but whether we get a change of the macro regime, which is a central banks being so um inclined to fight any any sort of volatility, uh, you know, sort of limited fiscal response. Like so many of our discussions come down to that,

including this question of whether the quant factors work. Yeah, I do think anygoes point on that that want investors rules based investing strategies might not be that good at capturing UM. Sometimes erratic policy or you know, unexpec acted policies by regulators, um central banks and the government. Like,

I think that is actually a fair point. And we know that cell side analysts tend to be pretty bad political analysts, So it's going to be really interesting to see how the quant world rapples with that, because we do see this consensus emerging about governments taking on a broader role in the economy post COVID. I guess the

question is like how long can you wait? Like if like you know, you could say, like, okay, a lot of these strategies haven't done well since the Great Financial Crisis, so we're talking like twelve or thirteen years or ten or eleven years now. You know, it's like that's a pretty big chunk of someone's career. Okay, maybe we're you're like waiting for like yeah, when mean reversion. Yeah, when I'm when I'm you know, finally the mean reversion is going to happen, and then I'm gonna make up for

decades of underperformance. Like it's kind of a lot of faith. Yeah, like I think that I think will one day be in like a new system. But man, like you know that's kind of like, yeah, I kind of want to like find something that works in the meantime. Yeah. Actually, I kind of feel bad. We should have asked about momentum strategies um in that podcast, which we didn't. But um, we'll have to come back to it. I guess plenty

more to talk about. Yeah. I have a feeling on whatever our next episode is, it's going to come back to the death of value investing or something similar. Um for sure. All right, shall we leave it there? Let's leave it there. Okay, this has been another episode of the Ad Thoughts Podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe wi isn't though you could have follow me on Twitter at the Stalwart. Follow our producer Laura Carlston. She's at Laura M. Carlton.

Follow the Bloomberg head of podcast, Francesca Leavy She's at Francesca Today, and check out all of our podcasts at Bloomberg under the handle at podcast. Thanks for listening to