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Economic and Market Commentary

Decoding Quant Strategies

Explore PIMCO's approach to quantitative investment strategies at our recent Alternatives Investor Conference.

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Text on screen: What is PIMCO’s approach to quant investing?

Images on screen: Nick Granger and Matt Dorsten presenting at the alts conference

Text on screen: Nick Granger, Portfolio Manager, Quantitative Analytics

Nick Granger: We kind of use quant investing and systematic investing synonymously, that what they really mean is using various fundamental statistical techniques alongside technology -- to identify repeatable inefficiencies in markets, be that through risk premia, investor asymmetries, repeatable patterns that occur for various reasons, use research to identify these features of markets and then build systems to trade and exploit these in a systematic and often automated way. So really the key difference between our systematic approach and a more familiar discretionary approach is we're effectively delegating the day-to-day decision-making of which trades to do to a computer to a sort of pre-set predefined set of rules. And this is very powerful in a number of ways. Firstly, there's a lot of alpha out there that you can only really -- the type of alpha where there's a small but repeatable edge that really lends itself to being captured by these techniques. It's just not feasible for human traders to do thousands and thousands of trades a day and make sure each of those is kind of sized and executed appropriately. Quant strategies are very good at doing this. I think the other interesting thing about this is it seeks to remove biases from the investment process. So we're not finding ourselves scrambling to decide what to do when volatility picks up or there's some market event.

Text on screen: What should investors be aware of when considering quant strategies?

Images on screen: Nick Granger and Matt Dorsten presenting at the alts conference

Text on screen: Matt Dorsten, Portfolio Manager, Quantitative Analytics

Matt Dorsten: Expectations are very important. Most people are looking at quant for something that's different and diversifying, and sometimes that can be more challenging to hold onto when you're realizing some of the diversifying behavior. Trend following is kind of the most extreme example of this type of behavior.

The thing that people need to think about is that trend following, like any strategy, has its own drawdowns and those tend to not be coincident with equity drawdowns. So you'll have situations where your quant strategies or trend following are kind of having a tough period, having a drawdown in isolation and nothing else is really happening in the world, quote unquote. And people are like what's going on here? And at times that can be very hard for investors to hold onto. But I think you have to have the right perspective going into this that if you're looking for something different and diversifying, you have to understand what that means. And what that means is that it's going to have unusual behavior at times.

Text on screen: How has quant investing changed?

Images on screen: Nick Granger and Matt Dorsten presenting at the alts conference

Nick Granger: So those of us running trend strategies in the decade from sort of 2010 to 2020 found certainly in developed markets, it was quite difficult to generate performance not just through trends, but through some other quant macro strategies that you very much had a dynamic where DM countries were very correlated. Central banks were kind of stamping on trends in either direction as they started to emerge by sort of talking up or down support. And that dynamic was quite difficult for quant. That's really gone away and especially more recently as inflation has come to the focal and you've seen much more diversification and distinguishability amongst even DM markets that you didn't see before. So the various value type strategies that we look at have become much more meaningful. There's much more for them to kind of bite onto in terms of differences between countries. And that's really come out over the last couple of years that we've seen sort of strong performance and interesting things going on in these sort of value models.

Text on screen: What are some of the new research frontiers PIMCO’s quant team is exploring?

Images on screen: Nick Granger and Matt Dorsten presenting at the alts conference

Matt Dorsten: So we've definitely been focusing a lot on adding new markets to our strategies in general, trend following in particular.

We've also expanded into inflation swaps in the U.S. and in Europe and some else other countries as well. We've also kind of expanded beyond that to inflation-linked bonds and you can get a wide variety of exposure doing that and that's something that you need to be able to finance the bonds in order to short them. It's something that you really need to have the infrastructure set up to do that, which we do.

Nick Granger: One of the really exciting areas we've been putting a lot of work into is systematic credit.

I think credit is also very interesting because it just sort of has more dimensions than most other asset classes to look at. Within credit, we’re really thinking about predictability at the issuer level, you can look across the curve, across the capital structure, think of how things change across ratings, how different covenants affect different bonds.

So there's just a wealth of data for quants to get their teeth into. And we've been doing a lot of interesting work building out a as of systematic credit trading capability.

Text on screen: For more insights and information, visit pimco.com

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