Trends Watch: Quantitative Investing Outlook

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.   

This week, Elana talks with Dr. Florian Mair, Co-Founder and CEO at Quintik Capital.  

What is your outlook for quantitative investing? 

As Marc Andreessen famously said, "software is eating the world," highlighting the transformative role of technology across industries. This has certainly come true in finance, where quantitative investing continues to evolve and expand its reach, driven by technological advancements and data analytics. 

The integration of artificial intelligence (“AI”) and machine learning algorithms, in particular, offers unprecedented opportunities to analyze vast datasets and uncover intricate market patterns that were previously inaccessible. However, they also present challenges, such as the risk of overfitting models to historical data, potentially leading to suboptimal investment decisions in real-world scenarios. 

To address the risk of overfitting, practitioners must employ robust methodologies and validation techniques, ensuring that their models are not merely capturing noise but genuinely capturing meaningful market signals. This requires a nuanced understanding of statistical techniques, careful feature selection, and rigorous testing across various market conditions. 

Moreover, the democratization of quantitative investing has led to increased market participation and lower entry costs for aspiring investors. While this has expanded opportunities, it has also contributed to market crowding, where similar strategies are employed by a multitude of players, potentially diminishing their effectiveness and increasing correlations. 

In navigating these challenges, we rely on an "ideas-first" approach rather than a "data-first" mentality. This means prioritizing a deep understanding of market dynamics, economic principles, and fundamental insights over relying solely on historical data. By anchoring investment decisions on robust theoretical frameworks and sound reasoning, we think that the risk of being misled by noisy data or succumbing to market fads can be mitigated. 

Where do you see the greatest opportunities and why?  

As a quant, I approach this question with some skepticism. While it's possible to occasionally come up with good discretionary or macro ideas, our focus leans more towards consistency and discipline. Instead of seeking out elusive "greatest opportunities," we prioritize strategies that offer reliable returns over time and can be systematically implemented with clear rationale and data-driven decision-making. That means identifying granular opportunities across diverse markets, allowing us to diversify risk and capture value in various conditions. 

From a portfolio perspective, the greatest opportunity is a timeless one: diversification. This means not only diversification of long positions, which tend to become highly correlated in periods of market stress, but also across time, markets and strategies. The resulting long-short portfolios can serve as excellent diversifiers, providing the flexibility to profit from both rising and falling markets while minimizing overall portfolio risk.  

Liquid alternatives have proven that they can stabilize portfolios during periods of heightened uncertainty and macro volatility. Managed futures strategies, for example, have shown great performance in 2022 and the first quarter of 2024. Therefore, I’d say we have some tailwind in terms of recent performance that opens some doors that might have been closed before. 

What are the greatest challenges you face and why? 

Our greatest challenge currently is to gain traction with institutional investors. Although we are lucky to have a well-balanced team with robust academic backgrounds and extensive hedge fund experience, we are a relatively new firm situated in Vienna, Austria, away from the main financial centers.  

Besides that, we have to deal with regulation and keeping our technological infrastructure up to date. However, we have quite a lean structure that allows us to focus on what really matters.   

What keeps you up at night? 

Currently, there are a few factors that are shaping the investment landscape that I tend to consider: 

• Quantitative easing is over; there is more macro volatility and TINA (there is no alternative to equities) is on pause. 
• Valuations are high across the board, no matter how you measure them, leading to lower long-term return expectations for long-only allocations. 
• The rolling stock-bond correlation hit a multi-decade high not providing the dampening effect on 60/40-portfolios as it did in the past. 

Adding uncorrelated return streams is always going to be a good idea, no matter what the environment looks like, but given where we stand right now, adding uncorrelated multi-strategy long/short strategies to your portfolio seems like a reasonable idea. 

However, while our scientific and systematic approach relieves us from the emotions of daily market gyrations, there's always a lingering concern about unforeseen market events or changes in market dynamics that could potentially impact our models' performance. Global central bank policy paths are certainly among them. 

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.