Wednesday, February 29, 2012
MIT Conference to Discuss Low Vol Investing
Next Friday, March 9, there's going to be an MIT Sloan Investment Management Conference, over in Cambridge MA. It's pretty cheap (~$100), and you can register here. Makes me a little jealous of people who live near Megacities like Boston, New York City, or Chicago, where all the Bloomberg terminals exist, because such things are so much more frequent. I'll be a discussant there on Low Volatility Strategies, and I'm hoping for some vigorous disagreement between various factions in the way that families often fight more than strangers.
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What do you think the capacity happens to be of low vol strategies? When pitching an idea that one finds appealing a large part of the audience being marketed to will say "won't this pay-off disappear as soon as more people invest in it?". If the opportunity is real their hesitation will help perpetuate the return opportunity. A few, though, will be swayed by an attractive PowerPoint presentation and the tone of the speaker’s voice, commit money to the strategy, bid up prices and lower prospective returns. As a for instance of the possibly inverse relationship between strategy AUM and strategy returns, $200-400 billion of AUM has been allocated to "commodities" since the publication of some influential articles in 2004 and it is possible to speculate that the "expected return" of commodities is now fairly low. The commodities market may be large but the market in specific commodities futures contracts is quite small.
A number of years ago a quant by the name of Lang Wheeler reflected on the "quant meltdown". He observed that there are a number of stages in the performance life cycle of a quantitative strategy: discovery of the strategy, initially "above average returns" for early adopters as they bid up the prices of the securities the strategy favors, and a less that wonderful end game when too much capital has been allocated to the strategy.
My guess is that if $200-400 billion of commodities AUM is killing commodities performance then there is too much AUM chasing commodities. Maybe commodities AUM has to scale back to $50 billion, or less. So, in that context, do you have a feel for the low vol AUM that does not kill the golden goose?
Any chance your particular panel discussion could be recorded? I'm sure I'm not the only one who would really enjoy watching this.
The only thing wrong with Lang Wheeler's comments is the idea that is applies specifically to quantitative strategies.
Well, I think low vol is more of a tilt than a quant strategy like pairs, or correlation arb, but even there it took years to eliminate. There is hardly any low vol focus relative to the entire market, so at this point it is well-know but still a fringe focus.
The capacity in dollars of a tilt is unlimited - it's just that the optimal tilt gets smaller and smaller until you approach a vanilla index fund.
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