The Golden Age of Quant

Students of history have used the expression the Golden Age to describe major periods of transformational advancement in nations, societies, professions, and the like. For example, golden age is used to describe the Elizabethan 17th-century era, characterized by peace, advancing economic prosperity, and English dominance in maritime power. Another example is the Golden Age of Hollywood, during which the world witnessed major advances in animation in the first half of the 20th century.

The question of whether the golden age of quant is behind us has recently been asked. This query emanates from media professionals and some market participants with the observation that many professional investors (particularly quants) now use similar data and similar models as investment building blocks. Moreover, these individuals point to cases of subpar performance in benchmarked investment returns.

This query is highly indicative of the 2007–2008 period, during which quantitative equity investing seemed to have lost its way. Recent commentary on performance is reminiscent of our motivation to write a paper on the subject a decade ago (Sorensen 2009). We highlighted two requirements for a healthy quantitative investing landscape. Managers needed to continue embracing (1) an innovative and diverse a set of approaches across the active investment arena and (2) the necessity of differing from each other in the ways they access and leverage information in terms of their information sources, processing, and implementation.

On the one hand, we noted that “catchy yet misleading phrases and fads … will also come and go, with the next batch of marketing-driven buzz.” This manifested in the subsequent decade with labels such as big beta, smart beta, and machine learning (ML), to name a few. On the other hand, we saw it as imperative that we persist in one of the primary motivations driving quantitative solutions: discovery and the pleasure of accomplishing enlightening empirical research. Dollars are the other motivation, often achieved by copying/marketing the discovery. Taken to an all too often extreme, however, dollars converging on discovery equals crowding. And crowding ultimately fosters capitulation, as in 2008–2009.¹

In Exhibit 1, the three circles are inherently emblematic and are essential foundations of true systematic quantitative investing. They have always existed as elements of success, although their tri-part magnitude and relative importance varies as...