Objective investing

Fair fees

Simplified process

Quantitative Overview

There are almost always advantages and disadvantages of any path taken. Below is a summary of our analysis, Advantages of a Quantitative Approach, along with several potential disadvantages which can be controlled.

Pros

Return Advantages

  • Process can be time-tested to determine the significance of their edge
  • Process can eliminate significant behavioral biases from the process
  • Process can evaluate a large opportunity set

Risk Advantages

  • Process can identify virtually all sources of risk in a portfolio
  • Process can reduce operational risk
  • Process can reduce the risk of being fooled by randomness
  • Process can help investors to maintain confidence during the inevitable periods of underperformance
  • Process can further diversify a multi-manager portfolio

Cost Advantages

  • Management fees should be meaningfully below market averages
  • Portfolio transaction and liquidity expenses should also be below average

 

Cons

Data Disadvantages

  • Data base(s) may have significant inaccuracies or omissions
  • Data base(s) may lack relevant factors, or have unnecessary factors which can create noise

Managerial Disadvantages

  • Portfolio manager(s) lack sufficient experience in back-testing research and real-time analyses
  • Portfolio optimization can result in very poor out-of-sample performance when inputs are estimated with significant error(s)
  • Dependent on historically significant factors continuing to be successful

 

Conclusion

Midwest strongly believes that a well-designed and well-implemented quantitative process meaningfully increases your probability of success.  Moreover, even if a process is simply “average,” the manager should be in the top one-third of its peers.  This is because management fees should be significantly lower than most active managers.