In 2005, with thirty years investment experience along with ongoing analyses, Midwest committed to a fully quantitative process in the securities industry. The reasons were:
- To maximize meaningful, consistent, and sustainable above-average net returns without increasing risk
- To minimize the two major obstacles to investment success, perpetual subjectivity and egregious needless fees
- To accomplish these objectives in a highly efficient, low-cost manner
There are always advantages and disadvantages to any path taken. However, virtually all the negatives can be controlled, and the firm is highly confident making decisions based on viable statistics and common sense. To learn how many of the strategies are formulated and implemented in the High Net Worth / Trusts-Estates, Non-Profit, and Institutional segments, view our Research Studies.
- 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
- 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
- Management fees should be meaningfully below market averages
- Portfolio transaction and liquidity expenses should also be below average
- Data base(s) may have significant inaccuracies or omissions
- Data base(s) may lack relevant factors, or have unnecessary factors which can create noise
- 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
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.
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