Equity analysts facing new quant challenge
NEW YORK (Reuters) - Wall Street equity analysts have had their share of problems in recent years, from regulatory heat to budget cuts to a loss of star power and prestige.
Now, with the growth of quantitative analysis, some are facing a worse possible fate: being supplanted by computers.
At an increasing number of Wall Street investment banks, hedge funds and elsewhere, computers are churning out investment analyses culled from enormous pools of data.
And some say they're more objective than human-based reports in determining which stocks, bonds or currencies to buy or sell. Increasingly, such programs are used to turbocharge traditional research.
"Given the same set of factors, it will always produce the same result," said quant industry veteran Tanya Beder of quantitative analysis. "Its signals are pure and systematic."
Beder, who built the quant trading division of top-performing hedge fund Caxton Associates LLC and was chief executive of Citigroup's (C.N) Tribeca Global Management in 2006, estimates that quantitative analysis and trading "drives one-third of the market" on any given day.
The trend has made quantitative specialists, or quants, among the most highly valued on Wall Street, with top players commanding seven-figure salaries, similar to stock analysts a decade ago.
"There's great demand for these rocket scientists," said Sandy Gross, managing partner at Pinetum Partners, a Greenwich, Connecticut-based executive search firm specializing in hedge funds. "They don't necessarily come out of financial services, but have a strong background in mathematics and statistics that can be applied to all asset classes."
Hedge funds, which are often early adopters of new investment methods, are spurring the development of quantitative strategies, which trade using mathematical, or algorithmic, models. Many such strategies were spawned at the internal trading desks at banks, notably Goldman Sachs (GS.N).
"It's all about trying to create an artificial analyst," said a portfolio manager at a large quantitative hedge fund who asked to remain anonymous. "It may not do it as well (as a human analyst), but it makes up for it in terms of volume."
BUY OR SELL
Traditional fundamental analysis leads to buy or sell recommendations based on a security's price compared with the analyst's projections for earnings, cash flow, relative valuation to peers and other factors, including the personal judgment of the analyst.
Now complex computerized programs can do all that and more, including employing vast reservoirs of data on historic prices to project how stock, currency or other prices may move.
Overlay that security-specific information with macro-economic data, forecasts, demographics, industry statistics and other information, and you get a more efficient trading model, proponents say.
The evidence of quantitative success is exemplified by top-performing hedge fund groups D.E. Shaw & Co. and Renaissance Technologies Corp., which both were founded by former university math professors and hire heavily from the scientific community. Continued...
