"The art of knowing is knowing what to ignore" - Rumi
Amid the explosion of created data over the past two decades investors ability to comprehend the relevant from the irrelevant has arguably become compromised. Paradoxically as we consume more information we become more prone to placing emphasis on irrelevant data and losing sight of what’s really important and in effect increasing noise rather than the signal. In this piece we go over a number of challenges related to information and its interpretation from an investment perspective and we then look at how we can deal with these issues in practice.
"It is the calm and silent water that drowns a man" - African Proverb
Quant models that are calibrated to historical data will struggle to adapt on their own to new patterns when the regime changes. To illustrate this point we look at arguably one of the most important variables in modern portfolio construction: the equity versus bond correlation. In this note we assess the diversification benefits of bonds going forward and whether we are on the cusp of secular change that can potentially be a blind spot for a number of investment strategies.
"Since all models are wrong the scientist must be alert to what is importantly wrong. It is inappropriate to be concerned about mice when there are tigers abroad" - George Box
As a quantitative asset manager, we constantly challenge the assumptions behind our models to try to figure out where they might go wrong. Historical studies are obviously at the heart of designing systematic strategies but sometimes it is important to step back and analyse circumstances where historical relationships might break. In this note we analyze the influence of central banks actions and their impact on portfolios especially around economic cycle turning points.
"Only when the tide goes out do you discover who has been swimming naked" - Warren Buffett
In this note, we assess hidden risks in quantitative portfolios with special focus on strategies that were left exposed during the testing period of Feb-March 2020. While some of these risks are well known many portfolios find themselves time and again exposed especially after periods of relatively prolonged market calm. We highlight our observations on inherent individual strategy risks, and portfolio construction and risk management considerations that are key to surviving such episodes.