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September 30, 2016 at 05:21 AM
The combination of factor investing and new technology is dramatically changing active management, according to a new report from State Street Global Advisors.
“We expect the advent of new data, tools and technology will give rise to a new species of active managers, increasingly looking at investment opportunities and risks through a factor lens,” says SSGA’s Fall IQ report, titled “The New Active.”
SSGA believes these three trends will have a big effect on active managers today and in the future.
1. Factor Investing
“Factor investing is disrupting traditional active management and raising the bar on managers to show how much of their return is true, skill-based alpha,” the report states.
It predicts that the factor-based process of natural selection will likely weed out many traditional active managers as well as some high-priced hedge fund managers.
According to the report, “factor investing provides a powerful lens for understanding the drivers of risk and return beyond traditional asset class categories.”
SSGA thinks the industry is at an important inflection point as factor investing contributes to the extinction of certain kinds of active managers whose factor exposures can be captured more cost-efficiently through smart beta strategies.
With interest in factor investing as an alpha generator growing, investors are keen to know how quant managers specify and incorporate factor signals into their investment models.
(Related: Factor Investing: A Post-Modern Portfolio Theory)
Vladimir Zdorovtsov, managing director of Active Quantitative Equity at SSGA, considers a “factor” more broadly as “a systematic decision criterion” or “a way to compare multiple investment opportunities using the same rule.”
When it comes to active factor investing, Zdorovtsov said, the quality of the factors is far more important than the number of factors used in a model.
“The point is that managers can end up with more factors than they really ought to have if they are not thorough and methodical when looking for improvements to their process,” Zdorovtsov said. “We believe you need to have a properly high bar for including a factor, as well as a process for revisiting and refreshing what is in the existing model.”
2. Data
The volumes of new data continue to “boggle the mind,” according to the Rick Lacaille, chief investment officer at SSGA.
Every minute, 7.8 million videos are viewed, more than 3.3 million searches are entered, 151 million e-mail messages are sent and more than 436,000 tweets are posted, according to Internet Live Stats (cited by World Wide Web Consortium) as of September 2016.
