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Morgan Stanley Quant Conference Touches On The Seven Hottest Industry Issues

At the 4th Annual Morgan Stanley Quantitative Equity Research Conference participants were asked rather discretionary questions. The Quant Conference answers pointed to trend continuation in some of the hottest industry areas while questioning other topics that appear on the cutting edge according to a new report from Adam Parker.

In short the seven trends discussed at the Quant Conference are:

1. Smart beta
2. Factor timing
3. Machine learning
4. Big Data
5. ESG / SRI
6. Risk
7. Market performance

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Equity value quants integrate with price-based quants

When understanding the quantitative investing space, it is important to first make a differentiation between equity-based quants using computer systems to identify core stock value and price momentum-driven quants such as managed futures CTAs and algo traders.

Traditionally, these two disciplines are often treated as completely separate – as if one is the red-haired step child while the other is the prom king. In reality, the two disciplines often integrate with one another in a market cycle and understanding market moves are best managed when considering both primary factors. Value investing factors are often reflected in algorithmic market signals at some point.

The Morgan Stanley quant conference appeared to appeal more to the equity value crowd – and some of the answers showed this.

When asked about market risks, the vast majority felt macro or performance of quant factors were the biggest risks in their portfolio. Price-based algorithmic players don’t often integrate traditional equity-based factor analysis into their algorithms, indicating the tilt of the audience. But more interestingly is the thoughts regarding central banks.

“Surprisingly, only 5% thought Central Bank policies were the biggest risk,” the November 21 analysis of the survey findings observed. Quants who follow price momentum have noted that, statistically, during periods of quantitative easing many of the traditional correlations and algorithmic indicators fell apart, leading to one of the more prolonged periods of underperformance in history. Equity-based value quants had little qualms in this realm.

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Quant Conference – 80% say smart beta will be bigger in five years, but only half are planning to introduce the lower-fee products

A significant issue among quantitative investors, many of whom had been feasting on a near 2% / 20% fee structure, is the advent of “Smart Beta.”

Professional fundamental investors have called “smart beta” a “marketing phrase.” At a 2014 Morningstar conference, for instance, Richard Ferri of Portfolio Solutions said he “would be surprised if 10% of the people running around saying ‘smart beta’ even understand what beta is.”

Assets under management have grown from near $50 billion nearly 7 years ago and near $450 billion in 2015, according to Morningstar data, pointing to a strong trend.

Some quants view smart beta as a major risk to their business models – despite smart beta generally underperforming some quant index averages to date. That said, 50% of those surveyed said they do not plan on introducing smart beta products while 80% think it will be bigger to or equal to today’s size five years from now.

Risks that the equity quants focus on include a US recession and a European Union breakup along with a China hard landing. Oddly, one of these concerns, the EU breakup, doesn’t have a basis in statistics while a US recession concern can be said to be a cyclical concern steeped heavily in statistics.

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Equity-based quants not big on machine learning

A big pull among the equity-based quants was factor modeling, with 60% surveyed saying they are either testing or using quant-based factor timing models.

The outlook on machine learning, perhaps society’s current hot topic, is less than thrilling. Only 27% of conference attendees surveyed are offering products and few have changed their minds on the topic. Separately, quants monitoring developments in this area note that documented success with such systems are rare as the hype has failed to live up to the reality.

Taking a look at predicting future markets – something many price-momentum quants are loathsome to do (they follow trends after they have been established) – the quants at the Morgan Stanley conference were quick to offer opinions:

Nearly half, 45%, predicted the S&P 500 will be flat or up 10% — a wide spread – year over year. That said, conference attendees were bullish on the US as interest rates were rising, with 47% predicting the US would be the best performing region year over year. In part, this is based on more traditional quant factors. “It definitely seemed like recent price momentum influenced the views,” the report said, noting that utilities – sensitive to interest rate hikes – was likely to be the worst performing over the next year.

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