In the rarefied hedge-fund world, quantitative investors carry an aura of mystery. They carefully guard their strategies to maintain an edge over other portfolio managers.
At a Management Conference breakout session on May 16 at Gleacher Center, attendees heard the inside story from three alumni who launched their own quantitative funds: Mark Carhart, PhD ’95; Ray Iwanowski, ’97; and John Liew, AB ’89, MBA ’94, PhD ’95. They discussed how they applied their Booth knowledge to their investment strategies, what it was like to endure the financial crisis, and why they do—or don’t—share their research.
Moderator Tobias J. Moskowitz, Fama Family Professor of Finance, called the trio “a who’s who of quantitative finance.” They arrived at Booth at a time when research in the field was booming, based on asset-pricing models developed in the 1960s and 1970s—particularly by Nobel laureate Eugene Fama, Robert R. McCormick Distinguished Service Professor of Finance.
Liew, a co-founder of AQR Capital Management, which manages $105 billion in assets, initially planned to stay in academia. Both of his parents were professors, and they strongly encouraged him to follow their path. “They had a belief that industry was really cutthroat, a scary place to be,” Liew said.
During the PhD program, Liew got a job working at a hedge fund in Chicago, and he was surprised to discover that he enjoyed both the work and his colleagues. Then his classmate Clifford Asness, MBA ’91, PhD ’94, asked him to join Goldman Sachs Group, which was starting a new quantitative research group. “I liked the idea of taking the financial theory we were learning in school and doing it in an applied setting,” Liew said.
Later, Carhart and Iwanowski joined Liew and Asness at Goldman to run the Global Alpha quantitative fund. As they developed their investment strategies, “the foundation was the research going on at Chicago,” including the theory of momentum in stock prices, Carhart said.
The group applied research by Fama and Kenneth R. French, a former Booth professor, and now a professor at the Tuck School of Business at Dartmouth College, on value strategies for picking stocks, Liew added. “Even though much of the academic research was on picking stocks, the mission at Goldman was to think about asset classes,” he said. “However, the ideas behind value aren’t unique to stocks—asset classes can get cheap and expensive as well.”
Liew and Asness left Goldman in 1998 to found AQR with two partners. Carhart and Iwanowski stayed on for another decade, managing the Global Alpha fund through some of its best years (at one point becoming the world’s largest hedge fund)—and some of its worst. 2007 was particularly difficult when quantitative hedge funds faced a massive liquidity crunch.
“When I walked in one morning, CNBC was on, and my name was up there, saying that these guys are doing terribly,” Iwanowski said. “When things are good, there’s a black-box mystique. But the acclaim you get from that is more than offset when things are going poorly. Then you hear, these guys don’t understand markets; they rely too heavily on the data.” Of course, the media failed to report that the fund was up in 2008 when most hedge funds did horribly.
In 2009, Carhart and Iwanowski retired from Goldman. Today, they each run their own quantitative investment fund: Carhart at Kepos Capital, with $2 billion in assets under management; and Iwanowski at Secor Asset Management, with $30 billion in assets.
The panelists agreed that they appreciate their independence, especially that they no longer face the challenges of operating within such a large and complex organization. The downside, especially at first, has been working to raise capital and convincing investors that their funds will stick around.
Another demand is the constant need for fresh ideas. “There is sort of a life cycle to investment strategies,” Liew said. “When we started, a lot of the ideas we worked on were in their infancy. Roll forward 20 years, and now a lot of these things are well known. As a business, we need to continue to innovate both on the research and product development front.”
For these alumni, the challenge is to always stay a step ahead of the herd.—Amy Merrick