Four Quantitative Investing Strategies That Work

“The overall volume of ESG-related postings grew at a faster rate than other types of roles over the period, which is consistent with companies increasingly focusing on sustainability. , but also showed significant variations across companies, sectors and pillars,” Barclays said. summary of the work said.

“We posit that ESG job posting data can serve as a leading indicator of future changes in companies’ ESG ratings given the lag between hiring decisions for ESG-related roles and the implications for business operations and activities.

“Consistent with our expectations, we find that companies with higher ‘abnormal’ ESG reporting intensity were more likely to experience rating upgrades approximately two to three years after the reporting date compared to their peers in the same industry with lower “abnormal” ESG posting intensity.

“Furthermore, companies with higher ‘abnormal’ ESG reporting intensity also enjoyed significantly better subsequent stock market performance relative to other companies, after accounting for exposure to common risk factors.”

2. Isolate signal from noise in shorts

The second winning strategy is one that will appeal to investors eager to take advantage of underperforming companies that are headed for more trouble.

Barclays’ QPS team looked at the level of short interest in stocks and why the strategy of backing top-selling stocks was less likely to predict future stock returns.

Barclays found that “in order to use short interest rate data as a predictive signal, investors need to properly isolate the ‘short interest’ component that represents negative views of the underlying company”.

Short-term interest driven by negative views on a stock has been a consistent predictor of stock and corporate bond performance for more than three decades.

To isolate negative stock level views from stock noise, Barclays has adjusted for a range of factors that may affect the level of short interest, including mergers and tax arbitrage and the limited supply of shares that may be borrowed for the purpose of short selling.

This last question is important because low levels of short interest may not accurately reflect an investor’s desire to sell short.

Four factors can affect the level of short selling: short sellers unable to find stocks to borrow, the opacity of the loan market can make it difficult to allocate a stock, some large institutions intentionally keep their holdings out of the loans and borrowing costs tend to increase with the level of short-term interest.

Barclays concluded that the information ratio of a long-short strategy based on short interest rates increases from 0.28 to 1.02 and that the maximum drawdown is reduced from 47% to 11%, once the quantitative model isolates negative opinions and removes unintended risk exposures.

3. Invest in the Chinese A-share market

A third winning strategy concerns the Chinese A-share market, considered too risky for many global investors.

In the third in a series of reports, Barclays’ QPS team found that allocation to the Chinese A-share market “leads to better performance of global equity-only and equity/bond portfolios, the major part of the improvement being the result of its low correlation with other markets, rather than its strong historical performance in the sample.

Barclays says return correlations between A-shares and other stock markets have been below 0.5 for the past 17 years, partly because of previous restrictions on foreign access.

But, the team concludes that it is still likely to be an important diversifier after the easing of restrictions, its heavy reliance on retail investors means the market is more predictable than other markets and the strong Retailer participation could expose it to behavioral biases that lead to alpha opportunities.

4. There is alpha in market distortion by ETFs

A fourth winning strategy is to take advantage of anomalies in the US stock market due to the influx of money into passive investment vehicles, including exchange-traded funds and index funds, which now exceed funds managed in funds. active shares.

In 2020, index fund assets under management reached $5 trillion, or about 16% of the total US market capitalization.

The analysis revealed that because passive funds have an incentive to minimize tracking errors, the increase in their importance has led to changes in the dynamics of intraday trading volume.

This has led to a change in the daytime pattern of trading volumes, in line with the tendency for passive funds to trade around the close to minimize tracking error. This has changed trading patterns and led to “intraday return predictability”.

Barclays says the predictability of late surges in trading activity caused by ETFs and index funds opens up opportunities for “considerable economic gains”.

Quantitative investing has seen a renaissance over the past year as increased market volatility has favored trend-following strategies.

The data published by the FinancialTimes in May showed the $337 billion ($492 billion) quantitative hedge fund industry making the largest gains since the 2008 financial crisis, according to data provider HFR.

Separate data from the Man Group’s latest financial results show strong growth in assets under management in its quantitative strategies which have generated consistent positive returns.

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Don F. Davis