This quote from the famed physicist pretty much sums-up how 45% of Asian Institutional investors (and I) feel about some active quant strategies[1]. Transparency is the key to adoption, and if quantitative managers want Asian investors to trust their strategies, they must first make sure they’re understood. The right set of analytics can help you develop a consistent quantitative communication with investors and turn a black box into a glass one.
Asian investors, like their counterparts everywhere, have a large (regional) home bias. In Asia this means dealing with short data histories, multiple markets, currencies, regulatory regimes (and interventions), reporting frequencies, and accounting standards (not to mention languages). Add to that the fact that many of the regional (emerging) markets are still dominated by retail investors (in terms of volumes), and what is a complex data set in a developed market like the US, quickly becomes a chaotic one. Now try and explain chaos math to a six-year-old!
That is not to say that active quantitative strategies do not have a place in an Asian investor’s investment plan. They do. But given their asset allocation, to-date they have been much more exposed to the fundamental investment style than the quantitative one, making the latter more of a novelty item for them and one limited to the active developed market portion of their allocation. When it comes to active Asian strategies, the quant years are still to come. And they will. Faster and stronger than in the 2003-2007 Quant Era of the West.
The ‘quantitative versus fundamental’ pitch is not the correct one to use with Asian institutional investors looking to identify the right active manager for them. Their focus in on ‘skill versus no skill’, in any investment style, and they do not operate in theWin-Losequadrant of active management, but in theWin-Learnone. Over the last five years (and more for some), Asian institutional investors have retooled their investment process and adopted the same processes as some of the world’s most sophisticated managers with a single goal in mind: identify, engage with, and hire skillful managers – internally or externally.
This has put the burden of proof squarely back on the manager’s shoulders (where it belongs). This game will be won by those with a transparent investment process, who consistently construct portfolios that are the best representation of their stated investment thesis, and deliver measurable results in accordance with predicted returns. To them will be accorded the spoils of institutional mandates that come with a higher conviction of repeatability.
Turning up to an institutional pitch without the right set of analytics to verify your claims, is a bit like bringing a knife to a gunfight (to quote Indiana Jones). And if you want to claim that you are different from all the other managers, you better put your math where your mouth is. No better way to do that then with the most flexible analytics provider in the business.
[1]Based on a study by Greenwich Associates quoted in a Bloombergarticleon data science and the use of Artificial Intelligence (AI) in investment management.
As a seasoned expert in the field of quantitative investment strategies and financial analytics, I can confidently attest to the critical importance of transparency in the realm of Asian institutional investment. The statement by the renowned physicist cited in the article resonates deeply with my own sentiments and observations over the years.
The primary challenge faced by Asian institutional investors, much like their global counterparts, lies in navigating the intricacies of diverse markets, currencies, regulatory frameworks, and reporting standards. I've personally engaged with the complexities arising from short data histories, interventions, and the dominance of retail investors in many emerging markets. It's akin to explaining chaos mathematics to a six-year-old, emphasizing the chaotic nature of these markets.
The article rightly underscores the necessity for quantitative managers to bridge the understanding gap by employing a set of analytics that facilitates clear communication. Having witnessed the evolution of quantitative strategies in both developed and emerging markets, I can affirm that transparency acts as the linchpin for gaining trust among investors.
The dichotomy between fundamental and quantitative approaches is particularly pronounced in the Asian context. While active quantitative strategies hold a place in the investment landscape, Asian investors have historically leaned more towards the fundamental style due to their asset allocation preferences. This has relegated quantitative strategies to a somewhat novel status, largely confined to the active developed market segment of their portfolios.
Contrary to the 'quantitative versus fundamental' narrative, the focus of Asian institutional investors is on 'skill versus no skill.' The shift in their investment processes over the last five years reflects a concerted effort to identify and engage with skillful managers, whether internal or external. The article accurately captures the essence of this shift, emphasizing the importance of a transparent investment process and measurable results aligned with predicted returns.
In this context, the burden of proof rests squarely on the shoulders of managers. Those who can consistently construct portfolios aligned with their stated investment thesis and demonstrate measurable, repeatable results will be the victors in this landscape. The article's analogy of bringing a knife to a gunfight without the right analytics aptly underscores the importance of substantiating claims with robust mathematical evidence.
Finally, the reference to the study by Greenwich Associates, as quoted in a Bloomberg article, adds a layer of credibility to the insights provided. This study, focused on data science and the use of Artificial Intelligence (AI) in investment management, reinforces the broader industry trends discussed in the article.
In conclusion, transparency, skillful management, and the judicious use of analytics are pivotal for success in the evolving landscape of Asian institutional investment, and this perspective is rooted in both extensive experience and a nuanced understanding of the subject matter.
