Why 2020 has been rotten for quant funds
The most interesting insight in this piece is that quant funds seem to suffer from the same weakness (in humans) that they were designed to profit from in the first place: “It is no small irony that momentum trading takes advantage of human weaknesses. One of these is “conservatism bias”. Investors tend to stick to prior views too rigidly and change them only slowly in response to new information. They may give undue emphasis to the price paid for a stock as a marker of its true value and, as a consequence, sell winning stocks too soon and hang on to dud stocks for too long. There is also a contrasting tendency to extrapolate past success. So as well as under-reacting to news, people also over-react to it. Momentum trading seeks to exploit this.
A lot of long-short strategies, including momentum, rank stocks by a particular attribute and then buy the top decile (or quintile) of the group and sell the bottom one….Sorting through thousands of securities quickly is beyond the meagre talents of a living, breathing portfolio manager. It requires algorithms that first establish and then fine-tune the optimal period over which to do the sorting…. You would not want to do all this by hand and brain….The most powerful machines can make sense even of unstructured (“big”) data. But an event like the discovery of a vaccine can flummox even the smartest of them. Humans retain an edge. They are able to winnow down endless possibilities using mental shortcuts. They can imagine scenarios that the past has not thrown up—scenarios such as “a vaccine may become available soon, given the amount of money and effort being thrown at it”; and “news of such a vaccine might spark a sell-off in ‘stay-at-home’ shares and a rally in ‘get-out-of-the-house’ shares”.”