Evening Brief – 11.13.23
Quant Models for Private Markets
More than half of investors expect quantitative techniques to be applied to less liquid assets such as private equity and real estate, as market participants seek to expand systematic models outside traditional sectors such as equities and bonds. according to an industry survey by Invesco.
The 2023 Invesco Global Systematic Investing Study found that while the use of quantitative investing in alternatives continues to lag traditional assets such as equities and fixed income, more than half of respondents believe a systematic approach could be used in private equity and real estate investing.
Due to the more illiquid and less transparent characteristics of the asset class, as well as a lack of clearly quantifiable and consistent data, systematic methodologies have generally been regarded less easily applicable to alts such as private equity and real estate.
Whereas 98% of survey respondents now use a systematic approach to equities in their portfolio, and 73% use a systematic approach to fixed income assets, only a third (32%) utilize systematic investing in their private equity portfolios. But more than half (55%) said a systematic approach could be used for private equity investing.
Similarly, while just 31% of real estate investors presently employ quantitative systems, 54% believe a systematic approach might be used. Less than a third (28%) of infrastructure assets use systematic technology, while more (49%) see prospects for quant models.
“Although systematic models are now well-embedded within fixed income and equities, the anticipation is growing for this approach to spread to other asset classes,” the report observed. “Higher yields, coupled with a shift away from quantitative easing, means conventional macro factors are taking center stage in determining returns across various countries and sectors.”
Invesco also examined how investors are broadening the scope of their systematic strategies beyond factor-based investing, which is seen as the cornerstone of quant funds, into areas such as dynamic asset allocation, multi-asset analytics, derivatives- and options-based risk mitigation, ESG, and AI/machine learning.
The report surveyed 130 institutional and wholesale investors, including pension funds, insurance companies, sovereign wealth funds, consultants, wealth managers and private banks, collectively managing $22.5 trillion in assets globally.