'Quant:' the buzzword hedge fund workers can no longer afford to ignore

Key Points
  • Fund managers are embracing one of the hottest facets of finance
  • Shift from human to machine has been long underway
  • Quant funds and their share of trading have skyrocketed
'Quant:' the buzzword hedge fund workers can no longer afford to ignore

If there ever were a sign of the times, it would be the hoard of hedge fund employees piling into Manhattan's conservative Union League Club on a recent day to spend time soaking up information and contacts in one of the hottest facets of finance: quant.

Many of the attendees work at traditional funds, but stock-picking has fallen out of style, replaced by quantitative strategies that use numbers and computer algorithms to select stocks. These workers now feel compelled to understand the technology side of the business to survive.

The shift from human to machine in the realm of investment decisions has been long coming. Funds have been putting a greater emphasis on technology for decades. But as broader hedge fund performance has lagged, "quant" has become a buzz word for the industry, and it's an area of finance that traditional MBAs and financial analysts can no longer afford to ignore.

A recent report by Barclays defines the period from 2013 to the present as the "resurgence of equity quant." They predict that more than half of investors (54 percent) will be allocated to the strategy this year -- up from 38 percent to 48 percent in 2015 and 2016. The upward trend in allocation will be driven by new investors entering the space, Barclays said.

Leigh Drogen, the chief executive of the data and analytics firm Estimize, thought of the idea for the one-day all-you-can-quant conference, entitled Learn 2 Quant, after speaking with several portfolio managers who were taking coding classes in their free time at the networking and educational center General Assembly.

Money has surged into quant hedge funds and their share of trading activity in the market has skyrocketed, Drogen said.

Barclays said investors were previously reluctant to put money to work in an area they didn't understand, something the bank termed an "algo aversion." But those concerns appear to have subsided, although it's unclear whether investors understand quant strategy any better now than they did two years ago.

It's also unclear whether investors are seeing better returns.

"Despite the finding in our survey that nearly 70% of investors believe that systematic [hedge funds] have outperformed their discretionary counterparts in recent years, our analysis suggests that over a long period of time, this is not a foregone conclusion," Barclays wrote. "Systematic" is another term used to describe trading that utilizes computer models more than human insight.

And yet, hedge funds are staffing up. During a panel discussion at the Learn 2 Quant event in Manhattan on Tuesday, Dan Furstenberg, a managing director at Jefferies, and Drogen made a prediction. They said that while having a data scientist or a group that focuses on a data is a luxury today, within the next 18 months investors will demand it of hedge funds.

The takeaway from the event was not that all hedge funds will soon be overtaken by computers. But understanding how to better use computers to inform investing will be a critical part of running a hedge fund for the foreseeable future.

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