Quant: Integrated circuit
What happens when a big, traditional asset management company sets out to diversify its risk and revenue streams by acquiring a smaller team of successful quants? Rob Job, head of business development at quants specialist PanAgora Asset Management, outlines his firm's model of an operating committee with "business-oriented people" like himself and the COO sitting alongside senior investors with years of quants experience.
"As you start talking to larger businesses, particularly those that have gone through acquisitions, that issue of senior management having deep knowledge of the quants business becomes more important - and something that has to be managed," he argues.
That is easier said than done if the rationale for acquiring quants is to diversify into fundamentally different risks and alpha: the acquirer has to balance bringing them into their institutional infrastructure while nurturing their push-the-envelope entrepreneurialism.
Susanne Willumsen, a portfolio manager who joined Lazard Asset Management as part of a nine-strong quants team from State Street Global Advisors three years ago, plays down the ‘clash-of-cultures'. She and Lazard's more traditional managers are all bottom-up stockpickers: what they try to assess through company visits and balance sheet research, her team assesses through quant screens. But on the other hand, Willumsen also picks up on something the third-party software vendors emphasise in our main article: that two risk-management tools are better than one.
"Lazard's risk management operation was one of the attractions to us," she says. "The resources are impressive, and many of the risk models they use are ones we have used for years, but the most helpful thing is that they consider new angles because they had different risk tools and use them from a different perspective. For example, in portfolios like our low-volatility strategies it was helpful to have insights from our infrastructure team after the Japanese earthquake struck, because that gave us some explanation of the sources of risk when market behaviour was running counter to what our models might anticipate.
"The process of building risk models is located at the level of the quantitative equities team, not at the Lazard level, but they do, of course, have to understand them well. We are not involved in hugely complex modelling, but we do have monthly meetings to go through what is happening to our risk in a formal way."
David Suetens, chief risk officer at ING Investment Management, speaks from within a multi-boutique culture. "It's very important that a quant boutique should not be an isolated boutique - it needs to be subjected to your integrated control framework," he says. That happens on several levels at ING IM. Not only is performance measurement a completely independent "second line of defence", but even quant research is a common function available to all the boutiques - eliminating any possibility of separate pools of intellectual property. Like the other boutiques, the quants business has an investment committee that includes ING IM-level risk managers, so that it cannot become a closed shop. And the investigation of anomalies is the responsibility of operational risk and compliance functions that work independent of the boutiques and report direct to ING IM's risk committee.
"That is why many of the people we hire for our risk management function could happily work within a portfolio team, including quants, because they will have to work with quants teams on quantitative risk measures," says Suetens. "Half of the 50 here have strong quantitative backgrounds up to PhD level. From time to time, I'm able to hire someone from the portfolio teams, and vice versa - and as a firm, that's the ideal because that is what creates the risk-management culture.
"The smaller your firm, the more difficult it is to implement these ‘four-eyes' principals of independence; but then again, the larger you are, the more subsidiaries you have, the more complex it becomes. Ultimately it's about having an entrepreneurial culture that is as much risk-driven as it is yield-driven and a strong, pro-active second-line function is a prerequisite for this to act as a countervailing power."