Thursday, February 4, 2010

Another nail in the equity quant coffin

I had written extensively about why I am not a bottom-up equity quant, largely because the business of bottom-up equity quantitative analysis has become commoditized. Barriers to entry of equity quantitative analysis are falling rapidly. As a consequence, bottom-up equity quant alpha is shrinking rapidly.

Here is case in point. A friend recently asked me for my opinion of a service called Market Topographer. The service allows a user to analyze a stock based on a series of pre-determined factors - which makes bottom-up multi-factor modeling a breeze. It even provides for "stress test" analysis, i.e. how would a certain factor have behaved under past episodes of stress such as the LTCM crisis.

I have no doubt such a tool is a great benefit to equity quants everywhere. The ubiquitous availability of tools like this accelerates the commoditization trend of equity quantitative analysis.

For equity quants, it just means that you need to be more creative about sources of alpha. Don't try to be where everyone is but move somewhere outside the standard bottom-up equity quant framework.

1 comment:

walt said...

On a per word basis, this may be your most important post ever. For us in the uninformed masses, you might spell out in more detail what will not pay off. I'll start with a couple that come to mind: index funds and most equity funds. In principle a small equity mighty catch some alpha, but it's probably an unrepeatable pulse of beta.