Investors focused on stock market fundamentals have developed 'quant envy,' and some executives say they're making a critical mistake

Barry Hurewitz Top 100

  • Barry Hurewitz, global head of UBS Evidence Labs Innovation,
    told Business Insider some fundamental investors are making a
    critical mistake as they chase the returns quant funds have enjoyed
    over the years. 
  • Some fundamental investors attempt to use quantitative signals
    for a single stock instead of an entire population of stocks, which
    is what it’s meant for. 
  • Hurewitz said many fundamental investors are under pressure
    from low-fee ETFs and the returns quant funds have achieved in
    recent years. 

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Of the seven deadly sins, greed is the one most people affiliate
with Wall Street. 

However, according to one UBS executive, it’s another vice some
financial firms are guilty of that’s causing big problems:
envy. 

Barry Hurewitz, global head of UBS Evidence Labs Innovation,
told Business Insider some fundamental investors are making a
critical mistake in their attempt to follow in the footsteps of
their
quantitative-based competitors

Motivated by achieving the impressive returns quantitative firms
have enjoyed over the last few years, fundamental firms have tried
to take a page out their books, implementing big data into their
trading strategies. Hurewitz calls it “quant envy.”

“You have pressure from ETFs on fees, then you have performance
pressure from quants,” said Hurewitz of what’s pushing the change
in strategy for some fundamental shops. “And then this explosion of
big data and data science all coming at the same time, which is
something that they felt they were missing, and so they look to the
quants and say, ‘I’m going to do what the quants do.'” 

Read more:
Barry Hurewitz, global head of UBS Evidence Lab Innovations, is
redefining how investors use ‘alternative data’

The issue, however, lies in the differences in execution. Using
mountains of data, quants develop hundreds or thousands of signals
for potential market moves that are typically true on average. They
then develop an investing strategy based on the signals across an
entire population of stocks.

On the other hand, fundamental investor often times are only
focused on a small number of stocks. And while a quantitative model
is built to be true of an entire group of stocks, the same theory
isn’t necessarily true for a specific company. 

For example, analysis done on retailers is only useful if the
strategy is then applied to the entire group of retailers. Taking
what might, on average, be true for the entire group and using it
to invest in a specific company, such as Amazon or Costco, won’t
necessarily apply, Hurewitz said. 

“It’s like a psychological bait and switch,” he added. “You need
to actually think deeply about what is true for that company and
only that company.”

See more:
70,000 questions a year, satellite imagery, and dismantling
electric cars: How UBS is trying to change the face of financial
research

Doing so is known as an ergodic switch, Hurewitz said. And while
its basic statistics to understand what’s true of a population is
not necessarily true for an individual, Hurewitz said he sees the
issue crop up all the time.

George Mussalli, chief investment officer at
$43 billion quantitative investment firm Panagora Asset
Management
, told Business Insider he’s seen plenty of
fundamental investors use quants incorrectly. Often it’s an issue
of not fully embracing the strategy. A quant-based portfolio would
be developed only for the fundamental investors to override some of
the trades, destroying the entire strategy, he said.

Other times, fundamental investors are only looking for
confirmation bias from big data. Mussalli said an analyst Panagora
hired last year from a larger, multi-strategy firm had previously
been tasked with only pulling data that would validate the
fundamental investors’ hypotheses. 

“You can’t pick and choose when you apply it or not,” Mussalli
said. “It has to be consistent in the portfolio.”

To be clear, not every fundamental investor falls prey to these
issues, Hurewitz said. Some are sophisticated in their approach to
investing. They use the data to understand the key question for a
specific company and how to take a different view on it than the
rest of the market, he said. 

However, others that have been underperforming and are unsettled
by what they feel is a changing environment for investing are not
being as thoughtful with their approach to using data, Hurewitz
said. 

“They are doing things because you have people putting pressure
on them to do it,” he added. “So they’re building lots of models
around everything, and either the question shifts or its an
unstable question.”


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Investors focused on stock market fundamentals have developed 'quant envy,' and some executives say they're making a critical mistake