I’ve been crazy busy with my day job and Max – so my apologies for not posting more – that’s just the way it is at the moment. But in the meantime, I wanted to post a little diatribe I’ve been thinking about.
I’m going to start with a generalization – people that are used to investing based on typical investment metrics (Cash flow, earnings, etc) have a strong distrust of black-box quant strategies. I’ve seen it first hand.
But here’s my question: for the outside investor, why do they find it comforting that they have invested with, say, a value portfolio manager vs. going with a quant fund? The answer is pretty obvious: they think they understand what the value PM is looking at, and, more importantly, they have faith in the particular set of metrics that the PM uses.
I’ve read a lot of detailed fund prospectus (some from very large hedge funds), and I find them all pretty, well, general. “The portfolio manager selects stocks based on value metrics such…blah, blah, blah.” So why on earth would they have confidence in this methodology?
The answer of course is performance. This is why people chase performance. They see a hot hand and they move in.
But in my mind, they have no greater understanding of what the fund manager is doing than in a quant fund. So given that, is it even important that you understand how a quant fund works? Isn’t the only judgement the performance? And even if you did know what the value or quant portfolio manager was doing, how would that help you? Would you give them a call and say “hey, I know how to fix your issue!” and expect them to welcome the critique with open arms?
I guess what I’m saying is that if you’re investing with someone else, it doesn’t matter if they are a human or a black box quant strategy – they are both equally opaque. It is just that the value PM has the illusion of being understandable, and the quant strategy has the reputation of being either voodoo or genius.