WEBVTT - Inigo Fraser-Jenkins and Aaron Brown Debate The Future Of Quant Investing 0:00:10.800 --> 0:00:14.200 Hello, and welcome to another episode of the Odd Lots podcast. 0:00:14.240 --> 0:00:18.560 I'm Joe Wisenthal and I'm Tracy all the way, Tracy, 0:00:18.560 --> 0:00:22.680 we're gonna have a debate today. I know. It's our 0:00:22.800 --> 0:00:27.560 first ever Odd Thoughts debate. It's pretty exciting. I think 0:00:27.600 --> 0:00:29.520 we had one like a few years ago about like 0:00:29.800 --> 0:00:33.080 fiscal policy in India or something like that. I feel 0:00:33.080 --> 0:00:36.040 like we've had at least one before, but maybe not. 0:00:36.240 --> 0:00:39.080 Maybe I'm a hallucinating that. Yeah, I don't think so. 0:00:39.360 --> 0:00:42.040 And this one is kind of on a topic that 0:00:42.080 --> 0:00:45.000 we've we've touched on a few times this year. But 0:00:45.120 --> 0:00:52.120 it's the terrible under performance of quant investing in recent times. Yeah, 0:00:52.200 --> 0:00:55.920 exactly right. So for people who aren't its familiar. But 0:00:55.960 --> 0:00:58.320 as we've been talking about a lot, like a lot 0:00:58.360 --> 0:01:05.080 of traditional native strategies, quantitative signals have only done so so. 0:01:05.080 --> 0:01:08.680 So the most sort of obvious example, it's quantitative strategies 0:01:08.959 --> 0:01:13.160 that are built around value investing, identifying stocks that look cheap, 0:01:13.400 --> 0:01:16.720 buying them, shorting the ones that look expensive. Things like that, 0:01:16.800 --> 0:01:19.440 where you're sort of like take a screen or some 0:01:19.560 --> 0:01:22.560 sort of method and sift out hundreds or thousands of 0:01:22.600 --> 0:01:26.759 stocks that always turned them um a various sorts. They 0:01:26.840 --> 0:01:30.240 really have not delivered the performance that they did in 0:01:30.280 --> 0:01:33.880 the past, or that the performance that somely the academic 0:01:33.920 --> 0:01:38.080 work underpinning them would suggest would happen. Yeah, And I 0:01:38.120 --> 0:01:42.080 think a big part of this existential crisis for quant investing, 0:01:42.120 --> 0:01:45.120 if you will, is that a lot of that underperformance 0:01:45.160 --> 0:01:49.080 could be forgiven in you know, a lot of things 0:01:49.160 --> 0:01:53.440 have changed. There's been a lot of unexpected developments this year, 0:01:53.480 --> 0:01:58.760 to say the least, but even before quant investing or 0:01:58.760 --> 0:02:03.400 systematic investing, or factors such as value however you want 0:02:03.400 --> 0:02:06.640 to put it, they haven't been doing as well as 0:02:07.000 --> 0:02:09.160 one might have expected. So this is sort of a 0:02:09.280 --> 0:02:13.280 long term decline and has really just hammered at home. 0:02:15.000 --> 0:02:18.320 And I guess the question is and we'll get to this, 0:02:18.639 --> 0:02:21.400 but to me, the question is, is this like, are 0:02:21.440 --> 0:02:24.120 we waiting for the mother of all mean reversions? So 0:02:24.200 --> 0:02:26.840 you have years and years of underperformance for a strategy, 0:02:26.880 --> 0:02:29.359 and if you just hold out a little longer, then 0:02:29.400 --> 0:02:33.880 the big swing back towards historical norms happens. Or is 0:02:33.919 --> 0:02:38.000 there something uh deeper in systemic systemic such that maybe 0:02:38.040 --> 0:02:41.160 if everyone is engaging in the same strategies or the 0:02:41.200 --> 0:02:45.839 strategies are well known beyond beyond the universe of academics. Uh, 0:02:45.880 --> 0:02:48.000 they just don't work anymore because you know, we talked 0:02:48.000 --> 0:02:50.800 about the concept of alpha decay all the time that 0:02:50.840 --> 0:02:53.919 if everyone knows a winning strategy, then it doesn't work 0:02:53.919 --> 0:02:56.200 as well. So there's sort of seems to be like 0:02:56.240 --> 0:02:59.080 two big questions like which one is it? Or is 0:02:59.120 --> 0:03:02.160 it just a matter of quantitative strategies could still work, 0:03:02.320 --> 0:03:04.720 they just need to be sort of updated at their approach. 0:03:05.680 --> 0:03:08.079 Is it different this time? I have a feeling our 0:03:08.160 --> 0:03:10.440 two guests on this episode are going to have different 0:03:10.480 --> 0:03:13.280 opinions on that topic. Well, let's bring in our two guests. 0:03:13.320 --> 0:03:16.680 I'm super excited about having both of them on. We're 0:03:16.720 --> 0:03:20.000 gonna be speaking with Inego Fraser Jenkins. He's a quantitative 0:03:20.080 --> 0:03:24.840 strategist at Bernstein and UH. Last in October he actually 0:03:25.080 --> 0:03:28.080 uh published a piece an essay, and in it he 0:03:28.120 --> 0:03:30.040 said I'm no longer a quant and he kind of 0:03:30.080 --> 0:03:33.040 had this big rebuke to the industry. So we'll get 0:03:33.080 --> 0:03:36.320 to his arguments why and for a different perspective. Will 0:03:36.360 --> 0:03:39.160 also be speaking with Aaron Brown. He's a professor at 0:03:39.160 --> 0:03:42.000 the Math Institute at n y U. He's an author, 0:03:42.200 --> 0:03:45.520 he's a Bloomberg opinion contributor, and for a long time 0:03:45.560 --> 0:03:48.080 he was the head of financial markets research at a 0:03:48.200 --> 0:03:51.920 qu R, which is a big quant shop. So really 0:03:51.960 --> 0:03:55.840 delighted to have both of these guests on the show. 0:03:56.120 --> 0:03:59.000 Uh Indego, thank you very much for joining us. Thank 0:03:59.040 --> 0:04:02.880 you having me, and uh Aerin appreciate having it as well. 0:04:03.000 --> 0:04:06.960 Thank you very much, Joe. So let's get started, uh 0:04:07.080 --> 0:04:08.800 in Ago, why don't you just give us, you know, 0:04:08.960 --> 0:04:10.800 sort of dramatic And I have to say, you're kind 0:04:10.800 --> 0:04:15.840 of known for your dramatic statements because prior to prior 0:04:15.920 --> 0:04:20.440 to blasting the entire quant world, you famously attacked passive 0:04:20.520 --> 0:04:23.200 investing is worse than Marxism. I think you came on 0:04:23.240 --> 0:04:25.960 the podcast and said maybe your statements were a little overblown, 0:04:26.200 --> 0:04:29.200 but you certainly know how to uh say something provocative. 0:04:29.279 --> 0:04:32.840 So tell us why the sort of very high level 0:04:32.920 --> 0:04:35.920 view of why you think quant as we know it 0:04:36.000 --> 0:04:38.520 is busted. So be happy to and I want to 0:04:38.600 --> 0:04:41.560 be can start off by saying that the essay wasn't 0:04:41.560 --> 0:04:44.360 really intend to be anti quant funds per se, because 0:04:44.640 --> 0:04:48.400 the market is more systematically driven than it's ever been. 0:04:49.000 --> 0:04:51.600 Ye before, But I do want to kind of reject 0:04:51.720 --> 0:04:53.840 the canonical view of what kind of quantity is and 0:04:53.880 --> 0:04:55.760 how it's used in the market. I think there are 0:04:55.680 --> 0:04:59.159 a few different levels to this um you know. At 0:04:59.160 --> 0:05:02.080 one point that's but Tracy mentioned just now, which is yes, 0:05:02.080 --> 0:05:05.160 has been an under performance of quant funds this year. 0:05:05.640 --> 0:05:10.200 I think that's actually excusable given the high correlation of 0:05:10.240 --> 0:05:13.480 stocks in the market. That there's more tricky issue of 0:05:13.600 --> 0:05:17.719 the under performance of many quant strategies over last three 0:05:17.800 --> 0:05:21.320 years or more, and that's frankly harder to explain. And 0:05:21.360 --> 0:05:24.520 that's even true for some of the more so new 0:05:24.560 --> 0:05:27.680 approaches have been applied rather than just those exposed traditional 0:05:27.760 --> 0:05:31.320 factors UM and linked to that, there's inevitably the question 0:05:31.320 --> 0:05:33.080 of the value factor that maybe we can come back 0:05:33.120 --> 0:05:35.560 to at some point, I mean, the discussion and van 0:05:35.680 --> 0:05:38.240 the whites end value is dead or not dead. But 0:05:38.279 --> 0:05:41.360 then are two deeper questions too. So one is around 0:05:41.360 --> 0:05:45.000 the world of diversification, and the quant strategies tend to 0:05:45.000 --> 0:05:47.760 be diversified in two different ways. One is at a 0:05:47.760 --> 0:05:50.360 single security level and the others at the factor level. 0:05:50.520 --> 0:05:53.040 And there's plenty of really good reasons for this, because 0:05:53.120 --> 0:05:56.880 most quant models work on average rather than through high 0:05:56.920 --> 0:06:00.200 conviction and through tight risk control, and so when wants 0:06:00.240 --> 0:06:04.440 to be diversified. But the problem is that diversification generally 0:06:04.440 --> 0:06:08.280 speaking has counted against fund performance in recent years. That's 0:06:08.320 --> 0:06:12.160 true not just the quants actually, but for fundamental investors too. Now, 0:06:12.279 --> 0:06:15.320 some parts of that might well be temporary, but I 0:06:15.320 --> 0:06:18.760 would argue that that in the regime where real rates 0:06:18.760 --> 0:06:21.520 are held are very low for a long time, that 0:06:21.720 --> 0:06:25.160 might be more a long run concentration in the market. Um. 0:06:25.160 --> 0:06:27.880 And the other big issue is this assumption that the 0:06:27.960 --> 0:06:31.240 future is going to be like they passed and I 0:06:31.680 --> 0:06:35.320 applying back tests to making future investment decisions. Now, of 0:06:35.320 --> 0:06:38.920 course that's a really good way as a process for 0:06:38.960 --> 0:06:42.240 avoiding simply forming investment views by shooting from the hip, 0:06:42.440 --> 0:06:45.159 and I wouldn't want to advocate that. But equally, at 0:06:45.200 --> 0:06:47.559 the same time, I think there's an argument who made 0:06:47.880 --> 0:06:49.960 that the regime has changed. You know, if COVID doesn't 0:06:49.960 --> 0:06:52.920 counts the regime change, I'd struggled to see what would 0:06:52.960 --> 0:06:56.000 counts regime change. Now, we have be very careful in 0:06:56.640 --> 0:07:00.200 you know, constantly overlaying discretion your views on models that 0:07:00.240 --> 0:07:04.719 are meant to be systematic. That process has a troubled 0:07:04.760 --> 0:07:07.479 past in many cases. But equally, you know, I think 0:07:07.720 --> 0:07:09.920 that there is plenty of evidence that occasional regimes do 0:07:10.160 --> 0:07:13.480 change have been a very big way UM. And one 0:07:13.560 --> 0:07:16.880 particular aspect that now is a policy response to inflation 0:07:17.000 --> 0:07:19.960 post COVID and have that effective the formance of things 0:07:20.000 --> 0:07:24.239 like the value factor, but also just a mechanism of 0:07:24.320 --> 0:07:27.760 the interaction and macro forces and policy. I mean, I 0:07:27.800 --> 0:07:31.080 think we've been very used to a thirty year period 0:07:31.640 --> 0:07:36.760 where the main job cushioning the the economy of the 0:07:36.760 --> 0:07:40.360 business cycle and left to technocrats and central banks. That 0:07:40.440 --> 0:07:43.160 approach has been running out of ammunition for some time. 0:07:43.480 --> 0:07:45.520 I think the future is very different. It's a blend 0:07:45.560 --> 0:07:50.160 of fiscal and monetary policy, a blend that inevitably has 0:07:50.240 --> 0:07:54.080 more politics in it um and a long runway UM 0:07:54.120 --> 0:07:56.680 and it's sort of messier and harder to forecast. And 0:07:56.720 --> 0:07:58.120 so in that kind of environment, I think we need 0:07:58.160 --> 0:08:01.120 to be very careful about applying back tests onto the future. 0:08:02.960 --> 0:08:06.920 So there's clearly a ton to unpack there. I want 0:08:06.920 --> 0:08:11.240 to focus for now on the the point about narrow 0:08:11.360 --> 0:08:15.320 leadership by mega caps and that being a negative for 0:08:15.760 --> 0:08:20.840 quant factors that basically focus on diversification, or quant portfolios 0:08:20.840 --> 0:08:24.640 that focus on diversification. This is something that Aaron actually 0:08:24.680 --> 0:08:28.400 picked up in his response to your note you go, 0:08:29.040 --> 0:08:32.560 and he argued that, you know, people were saying similar 0:08:32.600 --> 0:08:36.160 things back in the late nineties nineties during the tech bubble. 0:08:36.240 --> 0:08:38.600 They were saying it was different this time, and maybe 0:08:38.640 --> 0:08:41.360 investors should go out and just buy the really hot 0:08:41.400 --> 0:08:43.800 tech stocks. And of course we all know how that 0:08:43.840 --> 0:08:47.240 panned out. So, UM, Aaron, maybe just to begin with, 0:08:47.360 --> 0:08:51.120 could you dig into that that mega cap leadership point 0:08:51.200 --> 0:08:55.960 and how it relates to quants. Sure, thanks, Tracy. Um, 0:08:56.200 --> 0:08:59.280 we may not get as a vibrant to debate as 0:08:59.320 --> 0:09:03.840 you want. Most of the stuff I heard, uh going 0:09:03.920 --> 0:09:06.679 to go so far? Um. I agree with um, not 0:09:06.720 --> 0:09:09.959 all of it, and uh, you know it's uh a 0:09:10.000 --> 0:09:14.520 little more nuanced than the headline of of his research piece. Yes, 0:09:14.960 --> 0:09:18.640 we have a technical name in quant finance for extended 0:09:18.720 --> 0:09:23.120 periods where the value factor underperforms, and we call them bubbles. Uh. 0:09:23.160 --> 0:09:26.880 The overvalued stuff gets more overvalued, the undervalued stuff gets 0:09:26.880 --> 0:09:31.280 even more ignored. Um. But but I do agree that 0:09:31.559 --> 0:09:34.800 this particular value drawed in we're seeing really goes back 0:09:34.880 --> 0:09:37.640 to the financial crisis. We have never in history and 0:09:37.760 --> 0:09:42.720 hundreds of years seeing a value draw down to this extent. 0:09:43.559 --> 0:09:46.360 And I and and one of the ways I agree 0:09:46.400 --> 0:09:51.640 with UH and Ago is that I think the issue 0:09:51.679 --> 0:09:54.400 here is not in the numerator, but in the denominator. 0:09:54.440 --> 0:09:57.160 Whenever you look at a price, you're looking at a price, 0:09:57.240 --> 0:10:01.079 you know in dollars per share st market hasn't changed 0:10:01.120 --> 0:10:06.800 fundamentally in ten years. UM. The dollar has quantitative easing, 0:10:06.880 --> 0:10:12.680 near zero interest rates, UH, massive FED purchases, massive fiscal imbalances. 0:10:13.240 --> 0:10:15.800 I don't think those are I mean, those are some 0:10:15.880 --> 0:10:18.480 of the reasons that we're seeing that the dollar has 0:10:18.559 --> 0:10:22.760 become different. If you do value factors using everything in gold, 0:10:23.160 --> 0:10:26.240 we find value is doing much better. I think that 0:10:26.320 --> 0:10:29.880 there is a fundamental process going on, and it is 0:10:30.520 --> 0:10:35.080 the market is awakening to the possibility of extended periods 0:10:35.080 --> 0:10:38.160 of significant negative real rates, and that's causing a lot 0:10:38.160 --> 0:10:41.000 of repricing in the market, and that makes the dollar 0:10:41.280 --> 0:10:44.520 a bad thing to value, a bad thing to use 0:10:44.720 --> 0:10:48.200 to measure value. So that's what I would say going 0:10:48.240 --> 0:10:49.760 on there. I don't think we're in the mother of 0:10:49.800 --> 0:10:52.480 all bubbles in the sense that you're going to make 0:10:52.520 --> 0:10:55.440 a huge amount of money shorting the SMP five hundred 0:10:55.520 --> 0:10:58.520 or buying puts. But I do think we could see 0:10:58.559 --> 0:11:03.559 a extended period five years, ten years longer really mediocre 0:11:04.320 --> 0:11:07.280 equity returns. I think that is the risk to investors 0:11:07.360 --> 0:11:12.760 more than an immediate crash. So intego, I mean, how 0:11:12.880 --> 0:11:15.559 much of this really is just a macro question in 0:11:15.600 --> 0:11:17.960 your view? And you know, this is again another thing 0:11:17.960 --> 0:11:23.400 that frequently comes up on our discussions, with lots of 0:11:23.440 --> 0:11:26.520 different guests coming at the question from different sort of 0:11:26.520 --> 0:11:30.400 intellectual frameworks, which is that, Uh, as long as we 0:11:30.640 --> 0:11:33.240 are sort of in this mode where the only like 0:11:33.360 --> 0:11:36.840 game in town, or the only sort of entity that 0:11:36.920 --> 0:11:39.719 stabilizes the economy is the FED, and the FED is 0:11:39.800 --> 0:11:42.120 sensitive to asset prices and doesn't want to see any 0:11:42.200 --> 0:11:46.120 draw down, etcetera, how much of this is essentially nothing 0:11:46.200 --> 0:11:48.640 is going to work until we get out of this regime, 0:11:49.200 --> 0:11:51.760 this economics. Yes, so I think there are a blend 0:11:51.960 --> 0:11:55.160 of macroshies and microshies here. I mean not that I 0:11:55.240 --> 0:11:59.120 want to in any way claim that count investing is 0:11:59.200 --> 0:12:01.719 just about the values, but value does tend to be 0:12:02.480 --> 0:12:06.679 a large exposure in many quant approaches and certainly would 0:12:06.679 --> 0:12:10.200 help if value had to turnaround. And I think there 0:12:10.200 --> 0:12:12.959 are you know, in the debate that's gone on the 0:12:13.040 --> 0:12:16.080 last ten years around is value dead or not dead? Um? 0:12:16.120 --> 0:12:18.479 And I said a view that is not dead ultimately, 0:12:19.280 --> 0:12:23.240 but equally I can see that there are headwinds for it, 0:12:23.679 --> 0:12:27.680 some which macro and some which a micro. So you know, 0:12:27.720 --> 0:12:30.880 I guess some of the more micro headwinds are around 0:12:31.160 --> 0:12:35.040 the technology change, destroyed moats around certain industries, uh, and 0:12:35.240 --> 0:12:39.200 the change in the basis by which corporate make investments 0:12:39.200 --> 0:12:42.200 more than intangible assets rather than tangible assets, and so 0:12:42.320 --> 0:12:45.360 something the measurement of value has been wrong. But one 0:12:45.400 --> 0:12:49.600 thing has been clearly missing, I think, and that is inflation. 0:12:49.679 --> 0:12:51.839 And you can show that of the last five years 0:12:51.840 --> 0:12:54.679 on daily data, the last ninety years on quarterly data, 0:12:55.320 --> 0:12:57.560 that period and inflation picks up tend to be generally 0:12:57.600 --> 0:13:00.559 can the good ones for value. And so in a 0:13:00.640 --> 0:13:03.200 sense you to say, well, we're waiting for a policy 0:13:03.240 --> 0:13:06.480 shift here. And I happened to think that once the 0:13:06.480 --> 0:13:09.439 immediate doest settled and we're out of our short term 0:13:09.480 --> 0:13:12.800 deflationary shock, then actually the policy response to COVID is 0:13:12.840 --> 0:13:15.480 going to be inflationary. In a sense that is part 0:13:15.559 --> 0:13:18.120 of what value investor is waiting for a long time. 0:13:18.559 --> 0:13:21.400 But with the enormous caveat. But I think there are 0:13:21.400 --> 0:13:23.600 plenty of good reasons why the policy response to that 0:13:23.640 --> 0:13:26.480 inflation when it comes will be different, and so there's 0:13:27.280 --> 0:13:30.120 I think a likelihood as I mentioned that real rates 0:13:30.160 --> 0:13:32.679 are held low for a long time, and what that 0:13:32.760 --> 0:13:35.200 leads to I think is something of a bifurcation and 0:13:35.240 --> 0:13:39.320 the value factor, where if value is an undervalued sickle company, 0:13:39.360 --> 0:13:41.840 then find it can respond and do very well and 0:13:41.880 --> 0:13:44.439 rebound a mean reverting that kind of environment. But the 0:13:44.559 --> 0:13:47.280 value is a financial company, then it's much less likely too. 0:13:47.600 --> 0:13:50.000 So if we're relying on simple baccess and what value 0:13:50.040 --> 0:13:53.240 does inflation environments, then I think it might be be disappointed, 0:13:53.400 --> 0:13:57.960 but more nuanced approach actually could potentially find some areas 0:13:57.960 --> 0:14:01.239 of value that outperformed. The problem is that it requires 0:14:01.640 --> 0:14:06.079 overlaying a regime policy view, which happens to be a 0:14:06.160 --> 0:14:09.360 subjective discretion we kind of core um. And the other 0:14:09.400 --> 0:14:12.480 thing I'd say linked to that is I really really 0:14:12.600 --> 0:14:14.439 want to be able to believe in MIANA version. I 0:14:14.480 --> 0:14:18.360 mean because without because with that MENA version, we're left 0:14:18.400 --> 0:14:21.440 relying on forecasts and huing things are not tertally good 0:14:21.440 --> 0:14:24.800 at making those um and in a world where I 0:14:24.800 --> 0:14:28.400 would argue that actually all asset classes are pretty expensive, 0:14:28.400 --> 0:14:33.160 you know, equities, credit, sovereign bonds, private equity, maybe the 0:14:33.280 --> 0:14:35.560 value factor is the only cheap thing that we can 0:14:35.560 --> 0:14:39.120 go and buy. The problem is that the way the 0:14:39.200 --> 0:14:41.880 goals are phrased in the industry, and the way the 0:14:41.880 --> 0:14:44.800 people think about their personal career risk, which can't be 0:14:44.840 --> 0:14:47.240 hedged away. You could be wrong for a period of 0:14:47.240 --> 0:14:50.880 time that makes almost impossible to hold it. And although 0:14:50.960 --> 0:14:54.160 the engine of mean version might look like it's very strong, 0:14:54.600 --> 0:14:57.880 we also do know that policy can simply override that 0:14:58.640 --> 0:15:02.520 for every long period of time. So I have a 0:15:02.560 --> 0:15:05.800 follow up question based on that, which is I mean 0:15:05.840 --> 0:15:08.080 you ago you sort of touched on this in your 0:15:08.120 --> 0:15:11.120 first answer, But one of the reasons people like quant 0:15:11.160 --> 0:15:15.480 investing or systematic investing is that you sort of avoid 0:15:15.760 --> 0:15:19.320 that shoot from the hip style of investing, where people 0:15:19.360 --> 0:15:22.400 can sometimes I guess, become too reliant on their gut 0:15:22.480 --> 0:15:26.720 feelings or irrational in one way or another. So should 0:15:26.840 --> 0:15:31.560 quants be attempting to factor in these kind of big 0:15:31.640 --> 0:15:36.360 macro calls into their portfolios. I think we need to 0:15:36.400 --> 0:15:40.680 be very careful about adding a continuous series of discretionary 0:15:41.200 --> 0:15:44.840 overlays onto what are meant to be systematic approaches to investing. 0:15:45.200 --> 0:15:47.840 And the fact is generally the shoot from the hip 0:15:47.840 --> 0:15:51.360 approach to investing, I think is going to struggle in 0:15:51.360 --> 0:15:53.920 a structural way. Frankly, in a world where there's so 0:15:53.960 --> 0:15:56.720 many cheap, semi passive ways to go and buy things 0:15:56.840 --> 0:15:58.600 used to be thought of as active, and I'm thinking 0:15:58.600 --> 0:16:02.080 you have sort of so called a beta strategies. Um, 0:16:02.160 --> 0:16:04.440 that's very hard to have an approach that you know, 0:16:04.880 --> 0:16:08.520 the only reminds on that. Having said that, occasionally, I 0:16:08.560 --> 0:16:12.040 think there are huge regime shifts that do take place, 0:16:12.520 --> 0:16:14.320 and I think this is one of them. I guess 0:16:14.320 --> 0:16:18.120 most obviously UM in the policy environment and the way 0:16:18.120 --> 0:16:23.760 the policy interacts with the market overall. En sure regime 0:16:23.840 --> 0:16:27.520 shift is a nice sounding term for this time is different, 0:16:28.400 --> 0:16:31.640 and quant is really based on the idea that sure 0:16:32.000 --> 0:16:35.800 things do change, but people overestimate the change. People overreact 0:16:35.880 --> 0:16:38.280 to the last six months, the last three years, the 0:16:38.360 --> 0:16:42.840 last ten years, and if you look at things over centuries, 0:16:42.880 --> 0:16:46.280 if you look at the same factor in many different markets, 0:16:46.280 --> 0:16:49.240 and context, and you stick to that. You're not right 0:16:49.280 --> 0:16:53.240 all the time, but you're right of the time. If 0:16:53.280 --> 0:16:58.240 you go with whatever is popular, you're basically never right. UM. 0:16:58.320 --> 0:17:00.920 And there are regime shifts in our day. It we 0:17:01.000 --> 0:17:05.240 have the transition from gold standard defeat money in nineteen seventy, 0:17:05.359 --> 0:17:08.359 we have the broken breaking of inflation in nineteen eighty two. 0:17:08.400 --> 0:17:11.200 Going further back, we've got World War two, the Depression, 0:17:11.680 --> 0:17:15.440 World War One. So we've seen regime changes before. They're 0:17:15.480 --> 0:17:18.480 in the data, and there's no reason to have a 0:17:18.600 --> 0:17:22.000 special way to deal with them now. Really, we've been 0:17:22.040 --> 0:17:26.800 talking about quantitative factor investing in US large camp equities, 0:17:26.840 --> 0:17:28.960 and that's that's one part of quant There is a 0:17:29.000 --> 0:17:33.840 whole quant macro UH strategy UM that is trying to 0:17:33.840 --> 0:17:37.040 take advantage of these macro things. You can be macro 0:17:37.200 --> 0:17:55.040 and still be quant you know, speaking of regime shift, uh, 0:17:55.280 --> 0:17:57.600 Aaron and Nego sort of hinted at it. I mean, 0:17:58.080 --> 0:18:00.320 you know, one of the things that strive to me 0:18:01.119 --> 0:18:03.080 I think about sometimes is you know, a lot of 0:18:03.119 --> 0:18:07.639 what was once UH sophisticated strategy is now like I 0:18:07.720 --> 0:18:11.480 can go into any online broker and quickly with a 0:18:11.480 --> 0:18:15.159 few key strokes by some sort of so called value 0:18:15.200 --> 0:18:18.199 e t F very cheaply. That used to be something 0:18:18.320 --> 0:18:21.240 that you know, powerful people of powerful computers and hold 0:18:21.240 --> 0:18:25.119 teams of traders had to do now super simple. Is 0:18:25.160 --> 0:18:28.280 that a regime shift? And is that a contributor to 0:18:28.440 --> 0:18:31.359 the alpha decay of some of these strategies? That the 0:18:31.440 --> 0:18:33.760 ease with which sort of anyone can replicate them. We 0:18:33.800 --> 0:18:36.280 don't need a whole team of geniuses. It's say an 0:18:36.280 --> 0:18:39.640 a q R to do them per se. Yeah, well, um, 0:18:39.720 --> 0:18:41.800 and about the geniuses, but we have a lot of 0:18:41.840 --> 0:18:44.600 degrees at hqu are No, I don't think so. For 0:18:44.680 --> 0:18:47.040 one thing, when more people pilo in, it tends to 0:18:47.040 --> 0:18:50.160 strengthen the strategy. Right, if everybody is buying value stocks 0:18:50.160 --> 0:18:52.520 and values going to value stocks will do well. If 0:18:52.520 --> 0:18:56.000 everybody is doing momentum, and momentum will do well. The 0:18:56.080 --> 0:19:00.080 problem comes when people change their minds. But also this 0:19:00.160 --> 0:19:02.679 is just a natural way of financial markets. You know, 0:19:02.720 --> 0:19:05.320 you start building a hedge fund strategy, you know, with 0:19:05.800 --> 0:19:08.520 new assets, with new ways of doing things. But then 0:19:08.640 --> 0:19:10.840 as you get better at it, as more people learn 0:19:10.880 --> 0:19:14.760 about it, as liquidity improves, Uh, it becomes a beta 0:19:14.800 --> 0:19:17.800 product that every retail investor can buy an et F forms. 0:19:17.800 --> 0:19:21.160 We should all be very happy about this. It is true. 0:19:21.200 --> 0:19:25.080 One of the downsides of doing cutting edge financial research is, 0:19:25.600 --> 0:19:27.520 you know, you don't get rich forever. You have to 0:19:27.520 --> 0:19:30.480 come up with a new idea every uh well frequently, 0:19:30.480 --> 0:19:33.200 basically constantly. You have to keep them, you know, improving 0:19:33.240 --> 0:19:36.359 your ideas and coming up with something new because the 0:19:36.400 --> 0:19:39.760 basic product becomes generic very quickly. But I'm to agree 0:19:39.800 --> 0:19:42.800 with Aaron. I don't think just because money has gone 0:19:42.800 --> 0:19:45.679 into alex cool and smart be two factors that it 0:19:45.800 --> 0:19:48.520 undermines the efficacy of the factors. Um, yes, okay, to 0:19:48.600 --> 0:19:52.879 are examples perhaps of of apparent inefficiency in the market, 0:19:52.880 --> 0:19:54.679 to have too much careful invested them and then they 0:19:54.680 --> 0:19:57.800 stopped working. But I think there are plenty of the 0:19:57.880 --> 0:20:00.960 reasons and why. But the slight value factors in the 0:20:01.000 --> 0:20:04.520 markets do have some long one efficacy behind them. And 0:20:04.560 --> 0:20:07.120 also it's a practical point if you look at where 0:20:07.240 --> 0:20:10.320 money to be invested in smart beta e t S, 0:20:10.359 --> 0:20:13.760 at least of that is indexed to the US market. 0:20:14.080 --> 0:20:18.439 But the apparent lack of performance in value is something 0:20:18.480 --> 0:20:22.960 that has been evident in European markets and to some 0:20:23.040 --> 0:20:26.680 extend nation markets has done blessed well to in recent years. 0:20:26.880 --> 0:20:28.879 I think that what's more interesting is this question of 0:20:29.400 --> 0:20:31.760 what that does for the goal of investing. And it's 0:20:31.760 --> 0:20:35.720 basically shifted the alpha beta boundaries somewhat. So on one 0:20:35.760 --> 0:20:38.280 hand you can think about as being a pain for 0:20:38.359 --> 0:20:41.080 an active manager to just raise the bar. What they 0:20:41.080 --> 0:20:43.359 have to do is not just enough to beat the market, 0:20:43.359 --> 0:20:45.600 but now they have to beat the market and value 0:20:45.640 --> 0:20:49.000 and quality and low foal and momentum. But equally, I'll argue, actually, 0:20:49.080 --> 0:20:51.679 ultimately good thing. So it makes it very clear what 0:20:51.880 --> 0:20:54.920 the true goal of act investing is. It's a generation 0:20:54.960 --> 0:20:57.600 of idistancretic alpha, and if you can do that, it 0:20:57.600 --> 0:21:00.880 goes to the heart of why people should a premium 0:21:01.000 --> 0:21:04.080 for an active fund. One of the topics that we've 0:21:04.080 --> 0:21:07.560 been talking quite a lot about it is value investing, 0:21:07.600 --> 0:21:10.080 of course, and whether or not if you did value 0:21:10.119 --> 0:21:14.320 investing in some different way, for instance, by including intangibles 0:21:14.359 --> 0:21:17.680 in book value, whether or not that particular factor would 0:21:17.680 --> 0:21:21.200 look a lot different and maybe be even brought back 0:21:21.440 --> 0:21:24.000 from the dead in one way or another. I'd be 0:21:24.040 --> 0:21:27.680 curious to get your views on value investing specifically, is 0:21:27.720 --> 0:21:31.359 there a way to resuscitate that strategy, and what does 0:21:31.640 --> 0:21:34.600 um A new regime shift if there is one, actually 0:21:34.600 --> 0:21:39.679 look like, well, thissten's aaron um. Adding intangible assets I 0:21:39.680 --> 0:21:41.680 think would not be a good idea. That's that's kind 0:21:41.680 --> 0:21:46.280 of sticking opinion into what should be a quantitative measure. 0:21:46.640 --> 0:21:50.199 There is active research in the value factor, and we 0:21:50.200 --> 0:21:52.800 shouldn't talk about it like it's dead everywhere. The large 0:21:52.840 --> 0:21:57.399 cap US equities yes, European equities yes, other equities not 0:21:57.520 --> 0:22:02.600 so much. Commodities no, in test rates no, real assets no. 0:22:02.920 --> 0:22:07.040 So so value is still working many places, um, but 0:22:07.119 --> 0:22:10.359 there is very active research. As I mentioned earlier, most 0:22:10.400 --> 0:22:12.920 of the focus on the research is not on the assets, 0:22:13.640 --> 0:22:16.880 but on the dollar. You know, it's the dollar still 0:22:17.080 --> 0:22:20.119 a valid measure of value, of value of a valid thing, 0:22:20.200 --> 0:22:23.000 and measure value in on my side, I you know, 0:22:23.040 --> 0:22:26.840 I think that there are headmand as the value factor. 0:22:26.960 --> 0:22:30.199 You know I mentioned sum early on. You know this 0:22:30.640 --> 0:22:34.400 idea that some set there's a lots of offensive motor 0:22:34.400 --> 0:22:36.840 around them, and so their value not just because of 0:22:36.880 --> 0:22:41.280 a a passing higher risk premeum attached them at some 0:22:41.280 --> 0:22:44.480 point a business cycle, because the structural problem is also 0:22:44.680 --> 0:22:48.399 the apparently monotonic move down in rates has kind of 0:22:48.440 --> 0:22:51.680 messed up the process of UNI version as well. But 0:22:51.720 --> 0:22:53.840 as I said earlier, I think that one thing that's 0:22:53.880 --> 0:22:56.720 clearly been missing is a macro force in the form 0:22:56.760 --> 0:22:59.879 of inflation, and probably not plausibly the first time. Intend 0:23:00.280 --> 0:23:02.800 I think that's a good reason to think why inflation 0:23:02.880 --> 0:23:06.600 kind of could materialize, And so the idea of finding 0:23:06.880 --> 0:23:13.720 you know, cyclical undervalued companies which fundamental or quant research implies, 0:23:13.760 --> 0:23:16.560