Unpacking QIS: Structure, Scale, and Systematic Investing | Systematic Investor | Ep.372

Episode Overview

• The episode analyzes the 2023 market theme of "fragility versus resilience," noting how markets have consistently absorbed negative information without a major downturn, with the S&P 500 showing standout performance.
• It provides a comprehensive overview of the Quantitative Investment Strategies (QIS) space, which has grown to an all-time high of approximately $1.3 trillion in assets.
• The discussion demystifies QIS, defining it as a "convenience store" of accessible, rules-based systematic exposures, using the S&P 500 as a foundational example.
• The conversation explores the four key pillars driving the evolution and proliferation of QIS products: academic research, evolving client demand, technological advancements, and market liquidity.
• It covers the expansion of the QIS user base from traditional institutions like insurance companies to a broader spectrum including private banks and hedge funds.

Key Concepts

• Market Theme: The primary market dynamic of the year is a tension between "fragility and resilience," where markets have proven surprisingly strong at absorbing negative news.
• 2023 Performance: US equities, particularly the S&P 500, have significantly outperformed most other strategies. In contrast, trend following has faced challenges, especially in fixed income and from whipsaws in commodity markets.
• QIS Market Size & Composition: The QIS market has reached a new peak of ~$1.3 trillion in notional AUM. The space is dominated by equity-focused strategies, which account for over half of the total exposure, followed by multi-asset and commodity strategies.
• Defining QIS: QIS is fundamentally a set of rules-based, systematic exposures designed to be accessible and operationally efficient. The S&P 500 itself is a prime example of a simple systematic strategy.
• QIS Value Proposition: The core function of QIS is to package and deliver various risk profiles (like risk premia or defensive strategies) in an accessible format, reducing the operational burden for investors.
• Drivers of QIS Growth: The industry's innovation is propelled by four main pillars: academic and industry research, evolving client demand for specific outcomes, technological advancements enabling new strategies (e.g., intraday), and the evolution of market liquidity.
• Evolution of QIS Users: The client base for QIS has broadened significantly from its origins with large institutional clients (asset owners, insurance companies) to now include private banks, asset managers, and hedge funds.

Quotes

• At 2:25 - "This year has been pretty much like a bit of a debate between fragility and resilience." - Nick Baltas describes the central theme of the market in 2023, where potential shocks are consistently absorbed.
• At 3:32 - "Nobody's able to beat the S&P 500. The Sharpe ratio of the S&P 500 has now decoupled from everything else. It's the best investment in the world." - Moritz Seibert highlights the standout performance of US equities, to which Nick Baltas cautiously replies, "Until it isn't."
• At 7:23 - "QIS... it's an interesting business. It's also, in a way, I would say, a little bit opaque to the outside observer." - Moritz Seibert frames the main topic of the episode, setting the stage for demystifying the QIS space.
• At 13:38 - "They say that the total notional assets under management, they have hit a new all-time high at about 1,300 billion US dollars." - Moritz Seibert reveals the significant and growing size of the QIS market according to a recent industry survey.
• At 24:00 - "One could think of a QIS offering nothing more than, I guess in a good way, a kind of a convenience store in the sense that there are various type of systematic exposures that can deliver performance." - This analogy describes QIS as a marketplace of accessible, rules-based strategies for different investment objectives.
• At 24:42 - "This is nothing more than a set of rules, and this is called S&P 500." - This quote simplifies the concept of systematic investing by using the widely understood S&P 500 index as a foundational example of a rules-based strategy.
• At 26:04 - "The way that I think about the QIS space is that it delivers different risk profiles in an accessible format and maybe reduces the operational burden." - This provides a concise summary of the core value proposition of QIS, emphasizing accessibility and operational efficiency for investors.
• At 28:43 - "The way I think about the QIS space over the years is as a combination of like four main pillars in terms of product development. There is certainly research... client segment... technology... and how markets evolve." - This quote outlines the four primary forces driving innovation and growth in the QIS industry.
• At 38:08 - "When you think about the early days of QIS... that has changed when most banks came up with, hey, we now offer intraday vol or we offer intraday momentum trading." - This explains the shift in QIS product offerings, from slower, long-term strategies to faster, technologically advanced ones.

Takeaways

• To demystify quantitative investing, start by viewing common indices like the S&P 500 as a basic, rules-based systematic strategy.
• Recognize that the QIS market provides a powerful toolkit for gaining efficient, accessible exposure to specific risk premia and defensive strategies that can enhance portfolio construction.
• Approach the current market with caution; its demonstrated resilience in the face of negative news may mask underlying fragility.
• When evaluating a quantitative strategy, focus on understanding the underlying rules that govern its decisions rather than being intimidated by its perceived complexity.
• Monitor the QIS space for new investment innovations, as its growth is fueled by a dynamic interplay between academic research, technology, and evolving client needs.