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In a new research report, “The Investment Assembly Line: Alpha Discovery and the Illusion of Automation,” TABB Group says that actively managed quantitative strategies currently account for 9% of all US equity assets under management (AuM), this at a time when quantitative assets represent nearly 33% of total US equity AuM, up from 14% in 2000.
The pervasiveness of quantitative methods throughout all global asset management strategies is undeniable and permanent, explain report authors Adam Sussman, director of research, and E. Paul Rowady, Jr., a senior contributing analyst. “From simple filters to the comprehensive strategy development platforms, all market participants today leverage the power of automation. For many strategies and markets, automation is now a competitive necessity. Full or partial strategy automation will pervade the methods of global asset management in both alternative and, perhaps more notably, traditional strategies.”
According to Rowady, strategy automation has had and will continue to bring several dramatic consequences to the asset management industry. “If automation can cause alpha to decay more quickly, then while automation is inevitable, the efficiencies gained by it may ultimately be offset by the cost of more rapid decay. However, since alpha discovery is still very much a manual process, the cost of discovery remains high.”
The new TABB report discusses the rise of quantitative strategies, the development of the tools to support those strategies and the application of those tools to a broader set of strategies. The authors define three high-level “flavors” of alpha – frequency, uniqueness and intelligence – plus sub-categories within each. Additionally, the report identifies four components of the strategy development lifecycle: data management, alpha discovery, alpha capture; the feedback loop; and the critical requirements any platform must meet for each component. The result is that while many pioneers built their own technology and will most likely continue to do, the growth of automation is creating a viable market for vendor-based solutions and TABB pinpoints six firms.
It is automation, explain Rowady and Sussman, that has driven firms to develop and implement investment ideas more quickly, some more innovative than others. The competition caused by the fierce pursuit of alpha, they add, fuels innovation. One form of this innovation is the integration of tools to streamline this pursuit. As such, vendor solutions have evolved to the point where they are more integrated across congruent steps on the process.
The latest incarnation of this innovation is the all-in-one strategy automation platform – the investment assembly line. Developed initially in proprietary settings, but known primarily by its vendor-produced counterparts, the comprehensive investment assembly line marks a significant milestone in the evolution of the financial markets.
Comprehensive platforms clearly remove a massive amount of administrative burden that formerly weighed heavily on the productivity of quants. The question is whether this dramatic improvement in theoretical productivity has been washed away with the decaying half-life of many or most forms of alpha.
“It turns out that your proprietary tools can be both a blessing and a curse,” says Rowady, explaining that custom tools, like a custom-tailored suit, are designed to fit the organization “like a glove,” performing to the exact specifications required with optimal efficiency and speed, with little superfluous functionality to slow the process. “The downside of this benefit is the fact that all technologies – and software in particular – require constant care and feeding to update, improve and evolve.”
Adds Sussman, “While the road to increased strategy automation doesn’t guarantee success, it’s a road that must still be traveled. The current velocity of intelligence – and the margin of information arbitrage awarded to those with computational superiority – simply demand it.”
The 20-page report can be downloaded by TABB Group Research Alliance clients and pre-qualified media at https://www.tabbgroup.com/Login.aspx. For an executive summary or to purchase the report, please visit http://www.tabbgroup.com, or write to info@tabbgroup.com.
