According to the Financial Times (August 14, 2006) Barclays Global Investors The world's biggest money manager has $1.600 trillion of quantitatively managed funds, about a fifth of its total. They are not the only ones. The amount of quantitative funds that Goldman actively manages has doubled. Also out of the 10 largest hedge funds in the world, three are purely quantitative.
The article quotes Bob Jones the heads Goldman Sachs' quantitative division. Mr. Jones says: "[Quantitative] strategies have simply delivered better and more consistent performance." This is probably true for developed markets.
In rule based markets where there is good corporate governance, free speech, access to information, transparency and unbiased efficient regulators, a quantitative analysis has a chance of succeeding, In emerging markets which are mostly relations based, it is the recipe for disaster.
First, many if not most companies in relation based countries are either government owned or family owned. Government owned companies always are managed with some sort of political component which many not be understood by any theory of economics or algorithm. Although family owned companies are managed more for profit, the profit many not inure to the benefit of minority shareholders.
Second, without many of the protections taken for granted in the US and UK markets, these markets are subject speculative binges. A brief look at the Saudi and Russian markets in 2006 where rapid changes of 30% in one month are not uncommon should be enough to convince an investor that thing may not be what they seem.
Third, local traders understand that property protections and economic gains may be transitory, so their investment horizons tend to be very short. The concept of a growth company may not exist in a country where regulations can change very rapidly.
Some emerging markets notably South Korea and India have made great strides in terms of better regulation. Still even in these markets the indexes and the economies are dominated by companies that may not understand the complexities of quantitative management. Until they do, investors might be wise to follow traditional methods of investing and when in doubt, follow that good old fashion human response. Panic!
William Gamble
EMERGING MARKET STRATEGIES
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