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Are Quants All Fishing in the Same Small Pond with the Same Tackle Box?

Keith Gustafson and Patricia Halper
The Journal of Investing Winter 2010, 19 (4) 104-115; DOI: https://doi.org/10.3905/joi.2010.19.4.104
Keith Gustafson
is a managing director at Chicago Equity Partners in Chicago, IL.
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  • For correspondence: kgustafson@chicagoequity.com
Patricia Halper
is a director at Chicago Equity Partners in Chicago, IL.
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  • For correspondence: phalper@chicagoequity.com
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Abstract

Widening anecdotal consensus in recent years has posited that quantitative managers as a group pursue similar alpha factors and similar portfolio construction methodologies, resulting in a “crowded trade.” In this article, the authors perform several types of empirical analysis to examine this claim. The authors find no distinguishable trend in return correlations among a broad set of quantitative managers in recent years, with an average monthly pairwise correlation of 0.34 during the 2007–2009 period versus 0.35 for the 2004–2006 period. Preceding years produced similar numbers. This evidence is corroborated through an analysis of actual portfolio holdings from quantitative managers. We find the average active weight holding correlations to be a low 0.14 over the 2007–2009 period. Moreover, in examining the factor loadings of the dataset, we find little evidence to support the notion of “common factor” loadings. We find only three factors where the mean is larger than the variance: price to forward earnings, CFROIC (cash flow return on invested capital), and shareholder yield (a combination of dividend yield, change in shares outstanding, change in total debt, and change in cash holdings). Even for these factors, the results are not strong, and for the vast majority of factors we find diversity to be the norm.

TOPICS: Factor-based models, portfolio construction, mutual fund performance

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The Journal of Investing: 19 (4)
The Journal of Investing
Vol. 19, Issue 4
Winter 2010
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Are Quants All Fishing in the Same Small Pond with the Same Tackle Box?
Keith Gustafson, Patricia Halper
The Journal of Investing Nov 2010, 19 (4) 104-115; DOI: 10.3905/joi.2010.19.4.104

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Are Quants All Fishing in the Same Small Pond with the Same Tackle Box?
Keith Gustafson, Patricia Halper
The Journal of Investing Nov 2010, 19 (4) 104-115; DOI: 10.3905/joi.2010.19.4.104
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  • Article
    • Abstract
    • PRIOR WORK
    • DATA METHODOLOGY
    • RETURNS-BASED ANALYSIS
    • HOLDINGS-BASED ANALYSIS
    • PATTERNS OF RETURNS—MEDIAN VS. DISPERSION CONFUSION
    • PATTERNS OF RETURNS—FACTOR EXPLANATIONS OF ABSOLUTE AND RELATIVE PERFORMANCE
    • CONCLUSION
    • ENDNOTES
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