Quantitative Investing and 'Enhanced' ETFs

One topic on which we have been focusing on recently is the rise of quantitative investing. Due in part to their recent success and the halo-effect of many new strategy-driven ETFs, quants have acquired a new-found respect on Wall Street. In the Financial Times there are a trio of items on the this trend.

Deborah Brewster reports on the rapid growth occurring at Barclays Global Investors (best known for their iShares ETFs) who manage money exclusively via quantitative methods. The rise in quant funds, including hedge funds, is in direct contrast to the 1990s where discretionary methods prevailed.

Three of the 10 biggest hedge funds in the world are purely quantitative.

The trend, which has given rise to nervous jokes about computers taking over, contrasts with the investing style prevalent in the 1990s, which was based on individuals making decisions.

According to FT.com, quantitative investing is growing twice as fast as traditional methods. Advocates for quantitative investing will point to the methods used allow these programs to sift through data in an unbiased manner, thereby avoiding common “behavioral” pitfalls of human managers.

With the rise in popularity of quantitative methods it should be all that surprising that one of the biggest quant hedge funds is looking to expand. Deborah Brewster in FT.com reports on a marketing push into traditional asset management by DE Shaw (hat tip to DealBook). One of the twists is that these accounts will be allowed to short up to a certain extent.

We would be remiss if we did not point to an amusing piece by Jay Walker over at the Confused Capitalist on the related topic of so-called “enhanced” ETFs. In it he takes to task worrywarts who are fearful of these new strategy-driven ETFs. Walker notes these funds are simply another form of semi-active management that we have seen previously. In other words, “there is nothing to fear here, folks.”

We will reiterate our caveat that quantitative investing is no panacea. In one of the FT articles, a critic complained that recent quant fund outperformance, has of late, simply been a function of the return on “value” factors. That could very well be the case. That said, there are decided advantages to quantitative methods. We will keep our eyes open for additional items on the topic of quantitative investing.