Goldman’s Rebuilt Quant Approach

When quantitative equity funds experienced a meltdown ten years ago, Goldman Sachs (among the hardest hit) “began to rebuild the strategies with less leverage and more diversity,” according to a recent Bloomberg article.

“A decade later,” the article says, “the quant unit has clawed itself back to respectability,” and now manages about $110 billion. But the team faces stiff competition, “with almost every asset manager chasing quant money, betting on similar factors and shaving fees on exchange-traded funds to near-zero.”

The article explains that the Goldman unit now “uses leverage in only some offerings and monitors markets for signs that certain trades are getting too crowded.” Gary Chropuvka, who helps lead the firm’s New York-based Quantitative Investment Strategies team, says that rather than fervently striving for benchmark—beating returns, the team focuses on “persistent and consistent” returns.

Quant units, the article says, “are more worried about overcrowding and a decline in performance than a repeat of the panic of 2007.” It refers to smart-beta investing pioneer Rob Arnott (founder of the firm Research Affiliates), who argues that the dramatic inflow of money could be smart-beta’s undoing. A few months ago, Arnott told Bloomberg, “People think I am saying smart beta is a bad idea. I am not saying that at all, but look before you leap.”

The article concludes by sharing Chropuvka’s view that “quant investing doesn’t imply that all decisions are made by machines on autopilot. Managers still set strategies, make the wagers and monitor risk to try to prevent another quant blowup.”