Caroline Jonas

Trends in quantitative equity management: survey results

In the second half of the 1990s, there was so much skepticism about quantitative fund management that Leinweber (1999), a pioneer in applying advanced techniques borrowed from the world of physics to fund management, wrote an article entitled: ‘Is quantitative investment dead?’ In the article, Leinweber defended quantitative fund management and maintained that in an era of ever faster computers and ever larger databases, quantitative investment was here to stay. The skepticism towards quantitative fund management, provoked by the failure of some high-profile quantitative funds, was related to the fact that investment professionals felt that capturing market inefficiencies could best be done by exercising human judgement. Despite mainstream academic opinion that held that markets are efficient and unpredictable, the asset managers’ job is to capture market inefficiencies for their clients. At the academic level, the notion of efficient markets has been progressively relaxed. Empirical evidence led to the acceptance of the notion that financial markets are somewhat predictable and that systematic market inefficiencies can be detected (see Granger (1992) for a review of various models that accept departures from efficiency). Using the variance ratio test, Lo and MacKinlay (1988) disproved the random walk hypothesis. Additional insights on return predictability were provided by Jegadeesh and Titman (1993), who established the existence of momentum phenomena. Since then, a growing number of studies have accumulated evidence that there are market anomalies that can be systematically exploited to earn excess profits after considering risk and transaction costs (see Pesaran (2005) for a modern presentation of the status of market efficiency). Lo (2004) proposed replacing the Efficient Market Hypothesis with the Adaptive Market Hypothesis as market inefficiencies appear as the market adapts to changes in a competitive environment. *Corresponding author. Email: frank.fabozzi@yale.edu

Market experience with modeling for defined-benefit pension funds: evidence from four countries

This paper takes a look at the modeling side of pension fund management. It is based on interviews with pension fund managers, regulators, consultants, and academics in four countries – the Netherlands, Switzerland, the United Kingdom, and the United States. The objective was to understand, through the experience of market participants, the role of modeling in managing defined-benefit pension funds. The 28 defined-benefit pension funds participating in the study have a total of €334 billion (

On the challenges in quantitative equity management

436 billion) assets under management. The findings of our study show that modeling is now considered an indispensable tool by many market participants. The need to manage the risk inherent in defined-benefit pension plans is the key motivation behind the growing use of modeling. In the Netherlands, for example, where private-sector plans did not experience serious underfunding problems after the 2000 market crash, the use of modeling is widespread and well-integrated in the decision-making process. Dutch regulators have recently mandated a risk-based approach and specified broad principles of sound modeling, including the marking to market of assets and liabilities.

Trends in Quantitative Asset Management in Europe

In this article, we provide an update discussion of the major findings of a 2007 study on quantitative equity portfolio management and their implications for equity portfolio managers. The study is based on conversations with asset managers, investment consultants, and fundrating agencies as well as survey responses from 31 asset managers in the United States and Europe. In total, 12 asset managers and eight consultants and fund-rating agencies were interviewed, and 31 managers with a total of

Modeling the market : new theories and techniques

2194 trillion in equities under management participated in the survey. Half of the participating firms are based in the United States; half of the participating firms are among the largest asset managers in their countries. Survey participants included chief investment officers of equities and heads of quantitative management and/or quantitative research. Despite some recent performance issues—not limited to quantitatively managed funds—we conclude that, given the number of investable assets, in the range of thousands, the trend towards using financial modeling in equity portfolio management will continue. Models are and will remain part of the asset management decision-making process though just how they are used and their depth of use will continue to vary from firm to firm.

Risk management : framework, methods, and practice

This study of the use of financial modeling at European asset management firms is based on interviews at asset management firms in the Benelux countries, France, Germany, Italy, the Scandinavian countries, Switzerland, and the United Kingdom. Since the fall of the market from its peak in March 2000, there have been six major changes: 1) we have seen a sharp increase in the use of modeling and quantitative techniques; 2) the performance of models has improved, and market participants now have a better understanding of models and their limits; 3) there is a growing use of multiple models and of methods to handle them; 4) there is increased use of value-based models and of factors that measure market sentiment; 5) risk management has assumed a greater role, as the handling of extreme events has gained importance; and 6) uncertainty as to the macrotrends in financial markets remains high.