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Quant at Barclay’s Global Investors

Business Week has an article on how Barclay’s Global Investors has hireed more than 100 Ph.D.s in quantitative areas to define its investment strategies. The article discusses the advantages of quantitative investing:

In traditional circles, quant has been derided as “black box” investing for its reliance on computer models comprehensible only to the double-domes who created them. The black box survives today in the more mystifying form of investing techniques derived from fuzzy logic, neural networks, Markov chains, and other nonlinear probability models.

As epitomized by BGI, though, modern quant investing is grounded in the same economic fundamentals that preoccupy mainstream analysts, though quants amass much more data and massage it more systematically than anyone else does. Another key difference is that quants ignore the story behind the numbers. The whole sprawling human drama of business is of no interest to Barclays researchers, who never venture out to call on a company or tour a store or a factory. If a thing cannot be measured and factored into an investment hypothesis for testing against historical data, BGI has no use for it.

Quants also are far more mindful of risk, as measured mainly by price volatility. Traditional portfolio managers tend to heighten risk by concentrating their investments in a relative handful of companies that they believe will beat the market averages over the long run. Instead of angling to get in early on the next Wal-Mart (WMT )or Microsoft (MSFT ), BGI spreads its bets across a broad market swath, frequently trading in and out to exploit small pricing anomalies. The firm’s $19.9 billion in alpha represents just 1.64% above the market return, on average.

It is in a discussion of a presentation by one of the researchers, Xiaowi Li, that it is clear the breadth of skills that can go into this sort of work:

Gathered around a table in a small conference room on the 28th floor of BGI headquarters were a half-dozen of Li’s peers, plus her manager and the co-heads of the overall Asian research effort, Ernie Chow and Jonathan Howe, both of whom joined BGI in 1999 and were the fortysomething graybeards of the group. Everyone in the room had either a PhD or a master’s degree in financial engineering. The disciplines represented included physics, applied mathematics, and operations research, as well as finance and economics.

Nice to see operations research mentioned without need for further definition.

{ 3 } Comments

  1. steve baker | January 12, 2007 at 7:02 pm | Permalink

    Mike, funny thing. I read that article and thought there were a couple time where certain math terms, including OR, were begging for explanations.

  2. Michael Trick | January 15, 2007 at 9:51 am | Permalink

    I agree looking, from a journalist’s perspective: you want people to understand every part of what you write. But I like it as a sign of increasing acceptance of the term. I look forward to the day when people don’t have to write “operations research, the use of models to aid decision making, ” (or whatever), just like they don’t write “physics, the science of matter and energy” (or whatever).

  3. Kris | February 23, 2007 at 10:12 pm | Permalink

    It’s great to look at operations research without complications. I am a little rusty now that I am in a new IT career.