Four successful quantitative investment strategies

“The overall volume of ESG-related posts increased at a faster rate than any other type of role over the period, consistent with companies increasingly focused on sustainability, but also showing significant variation across companies, sectors, and pillars,” the Barclays job summary says.

“We think that ESG job posting data may serve as a leading indicator of future changes in companies’ ESG ratings given the time lag between hiring decisions for ESG-related roles and their implications on company operations and activities.

“In line with our expectations, we found that firms with a higher intensity of ‘abnormal’ ESG posting were more likely to experience a rating upgrade approximately two to three years after the posting date compared to their peers in the same sector with a higher intensity of ‘abnormal’ ESG posting. lower.

“Furthermore, firms with a higher intensity of ‘abnormal’ ESG postings also enjoyed significantly better subsequent stock performance compared to other firms, after accounting for exposure to common risk factors.”

2. Signal isolation from noise in shorts

Second, a winning strategy is one that will attract investors who are interested in taking advantage of the underperforming company into more trouble.

The Barclays QPS team examines the level of short interest in stocks and why strategies supporting the shortest stocks tend not to predict future stock returns.

Barclays finds that “to use short interest data as a predictive signal, investors need to properly isolate the ‘short interest’ component that represents a negative view of the underlying firm”.

Short interest driven by a negative outlook on a stock has been a consistent predictor of the performance of corporate equities and bonds for more than three decades.

To isolate negative views on stock levels from the noise inherent in stocks, Barclays adjusts for a variety of factors that can affect short-term interest rates including mergers and tax arbitrage and the limited supply of stock that can be borrowed for shorting purposes.

This last issue is important because a low short interest rate may not accurately reflect an investor’s desire to go short.

Four things that can affect the rate of shorting are: short sellers cannot find stocks to borrow, the opacity of the lending market can cause difficulty allocating shares, certain large institutions intentionally keep their holdings out of the loan market and borrowing costs tend to increase with short interest rates.

Barclays concluded that the information ratio of the long-short strategy based on short interest increased from 0.28 to 1.02, and the maximum drawdown was reduced from 47 percent to 11 percent, after the quant model isolated negative views and eliminated unwanted risk exposure.

3. Invest in China’s A-share market

Third, the winning strategy relates to China’s A-share market, which is considered too risky for many global investors.

In the third in a series of reports, the Barclays QPS team found its allocation to the China A-share market “leads to better performance of its global equity and equities/bonds portfolios, with most of the increase due to low correlations with other markets, rather than historical performance.” in a strong sample.”

Barclays said the correlation of returns between A-shares and other equity markets has been below 0.5 over the past 17 years in part due to previous restrictions on foreign access.

However, the team concludes that this may still be an important diversification once restrictions are relaxed, its heavy reliance on retail investors means the market is more predictable than other markets and high retail participation could expose it to alpha-directed behavioral biases. opportunity.

4. There is an alpha in the distortion of the ETF market

The fourth winning strategy involves taking advantage of the anomaly in the US equity market from a flood of money into passive investment vehicles including exchange-traded funds and index funds, which now outnumber funds managed in active equity funds.

In 2020, assets under management in index funds totaled $US5 trillion, which is about 16 percent of the total market capitalization of US equities.

The analysis found that because passive funds have incentives to minimize tracking errors, their increased importance has led to changes in intraday trading volume dynamics.

This causes a shift in the diurnal pattern of trading volume, consistent with the tendency for passive funds to trade around the close to minimize tracking errors. This has changed trading patterns and led to “intraday predictability of returns”.

Barclays said the predictability of the eventual spike in trading activity caused by ETFs and index funds opens the door for “considerable economic gains”.

Quantitative investing has seen a resurgence in the past year thanks to increased market volatility in favor of trend-following strategies.

Data published by Financial time in May showed the $337 billion ($492 billion) quant hedge fund industry made its biggest gains since the 2008 financial crisis, according to data provider HFR.

Separate data from Man Group’s latest financial results show strong growth in assets under management in its quantitative strategy that has delivered consistently positive results.

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