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What’s behind the weak performance of quantitative investing?

03022020_Quant returns

What’s behind the weak performance of quantitative investing?

Equity markets have been very kind to investors in recent years, with stock indices setting new records in Australia and overseas. Notwithstanding some episodes of turbulence along the way, these good results continue a decade-long run of mainly positive returns following the depths of the GFC in early 2009.

In terms of relative performance, however, the story for many has recently been more challenging, with investors of different stripes finding it hard to generate returns in excess of market benchmarks. Among the most challenged on this front have been investors following a systematic – or quantitative – methodology, for whom 2019 (and in many cases 2018) was a generally painful year. A Hedge Fund Research index of long-short equity hedge funds that employ “sophisticated quantitative techniques” showed negative returns for 2019, and we have seen disappointing results from many of the funds we follow that use these methodologies.

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Tim joined Montgomery as Head of Research and Portfolio Manager of The Montgomery Fund in July 2012. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Before joining Gresham Partners, Tim worked for McKinsey & Company for four years, where he was involved in strategic consulting in both Australia and Denmark.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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4 Comments

  1. re: your comments on Tesla
    detailed analysis of projections @ https://ark-invest.com/research/tesla-price-target
    Bull case, in particular, @ 25% likelihood seems interesting @ $15000 / share
    Median value = $2700 (expected value = $7000)
    On 1st May 2019 Tesla was $185, 1st Feb 2020 $650
    If nothing else if it hits the median value of $2700 that is a great ROI,
    assuming of course we don’t have another economic collapse or we get a reversion of interest rates or another car maker doesn’t come up with some better technology AND won’t sell to Musk.
    Also, the analysis indicates that Ark Investments place a similar probability that Tesla will be $750 as they do that it will reach $21000 (~ 8% in each case) – Or another way of looking at it you have an 8% chance your shares will be values at less than what you paid for them & a 92% chance they will be valued at more than you paid for them with a 50% chance that you will have increased your investment by 4x in 4 years

    • Hi Joe, I’m familiar with some of Ark’s investment analysis but haven’t yet read their thoughts on Tesla, so I’ll check out the link. However, the point I was really trying to make here is that market price and consensus earnings expectations normally move in the same direction, but recently seem to have become detached in many cases. In hindsight, it was possibly unhelpful to reference the Tesla example, for which value estimates include everything between zero and just this side of infinity.

  2. Carlos Cobelas
    :

    the terrible fee structure of market neutral funds is the main reason I sold out of them
    and am not likely to ever return to them.
    charging a performance fee for beating the RBA cash rate…..good grief !!

    • Hi Carlos. You’re certainly not alone in wondering why investors would be willing to pay a performance fee above a cash rate. The paper linked below may help explain why some investors are attracted to these structures, and how they can be used to improve portfolio risk and return metrics. Today, it is mainly institutional investors that do this, but when used correctly, these structures can benefit most equity investors.

      https://rogermontgomery.com/why-invest-in-a-market-neutral-fund/

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