Tuesday, April 27, 2010

Quant Confusion

US equity quantitative strategists at Barclays Capital wrote yester-night:

As the market continues to rally onwards, traditional methods for investing continue to struggle to add value. Quality investing continues to underperform as a strategy, as companies with lower quality of management, more leveraged balance sheets and less repeatable earnings continue to outperform their counterparts. Additionally, companies with weaker future earnings estimates and worse analyst recommendations are also outperforming. Valuation appears to be largely irrelevant to investors. This trend in place since March 2009 has yet to show any signs of breaking.
Does the following sound amazing?:

Where is the model failing? Well, to put it succinctly: everywhere. Our Quality theme – the strategy of buying high Quality stocks and selling low Quality stocks – is down 45 bps for the month. Our Sentiment theme – the strategy of buying stocks with strong investor dynamics and selling those with poor investment dynamics – is down 125 basis points for month. And our Valuation theme – the strategy of buying cheap stocks and selling expensive stocks – is basically flat, down a mild 15 bps for the month.
Click on chart to enlarge, courtesy of Barclays Capital.

Well, they had false signals last year too. But how is the statistical arbitrage doing now?

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