Analysts specializing in fundamental research, consigned to oblivion just a few years ago by proponents of mathematical finance, are regaining favor.
In recent survey, JPMorgan Asset Management found more than a third of European institutional investors felt less positive about quantitative equity strategies than a year ago, while 80 percent of the largest ones felt more positive about a fundamental approach. That reinforces indications from elsewhere that the credit crisis is spurring demand for analytical skills needed to dissect balance sheets and other financial statements.
Quantitative or model-driven funds grew rapidly earlier this decade, as institutional investors poured money into strategies whose buy and sell decisions were dictated by algorithms designed by scientists. The facade began to crack in August 2007 when one of the largest and hitherto most successful quant funds, Goldman Sachs' Global Alpha, lost 22 percent in one month, led by a carry trade gone awry.
Downfall of Household Names
At the same time, The Wall Street Journal reports, the recent collapse of several "household name" companies in the financial and automotive sectors created a major impetus for turning back to fundamentals. "The standing of even the most blue-chip stocks has been put into question," observes the JPMorgan report. "Institutions need to know more than ever exactly what they are investing in."
What's more, the bear market of 2008 and early 2009 left even financially strong companies trading for significant discounts in the stock market. "There were so many high quality, debt-free companies trading at or near the cash on their balance sheet, meaning the underlying business was technically trading for free," says Ben Axler, co-founder of New York-based Spruce Point Capital Management. "Quant programs are not designed to understand the qualitative aspects, fundamental story and potential catalysts to correct valuation disconnects."
Also spurring the move away from quant-based strategies is the concept of too much capital seeking too few good ideas, which arbitrage away opportunities the models seek to exploit. Says Andy Barber, head of research at consulting firm Mercer: "Investors are far more wary of quant than in the past, and the data which managers use is commonly available."
Still, Wall Street quants aren't about to be shunned. Their skills remain central to many trading strategies and business models, both buy-side and sell-side. Last month, several quant-focused headhunters reported seeing a spike in demand for quantitative research analysts and engineers in areas such as options automated market making and high-frequency algorithmic trading.