Thinking
about the analysis of systematic global macro and managed futures managers, I
asked a simple question, is there a difference between a quant and system
developer. A portfolio system is a complete integrated approach for making
market predictions and investment decisions including sizing, entry, exit, and
risk management. Is it possible for a manager to be less well-trained as many
newly minted engineering quants, but still be talented at building portfolio
systems?
Many use
these words quant and system developer interchangeably, but in practice, there
are significant differences. Simply put, all quants are not system developers
and all system developers are not quants. This distinction is important. A
quant can find relationships in the data. The systems developer exploits the
relationships found by a quant. Of course, someone could have the
characteristics of both, but we view them as separate skills.
The
investment into a systematic manager should focus not just on the quality of
their quants, but also on the firm's ability to build systems. This is similar
to the question of differences between research and portfolio management in
traditional money management. Now, this can blend into the same thing, but we
believe focusing on the different skills is helpful. The quant is a signal
extractor. The systems developer is a signal adaptor.
The
extraction of signals can be relatively simple through looking at trends or
momentum or it can be complex through the measurement of multiple risk premia.
The real work may come through analysis of the system developer who has to take
the signals form the models and balance them in a portfolio.
We know
that predictions in financial markets have low explanatory power, so sizing
position, setting entry points, and determining when to exit through either
changes in signals or stop levels is critical. The set of signals across all
asset classes have to be blended into a portfolio. Some will call this the art of
portfolio management but it not something that is usually discussed in quant
training.
The quant
is perhaps more akin to the research in a traditional money management firm
while the system developer is closer to the activities of the portfolio manager.
By separating the functions of quant and system developer or research and
portfolio management, the activities conducted by the systematic manager are
given more clarity.
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