And yes, please tell me how you get information that dependably contributes to portfolio alpha from company visits.

Cheers, Herb

In their absence, the natural background level of volatility would assert itself.

So More quants = artificially less volatility. Now no-one wants to give money to Quants, so the “sustainable number of quant funds” as you put it is lower than this time last year.

This is my thesis, and I can’t prove it. But the increase in volatility measures in the market (check out VIX on Yahoo finance) does chime with the difficulties of the Quants, however.

And note I am only talking about the Gaussian ones.

But intuitively your point makes sense, and I have to agree with you. As I note above: “nervous nellies like Bookstaber and Buttonwood will in fact miss them . . . Quants’ absence will increase volatility and the magnitude of directional movements in markets and stocks.”

What you [importantly] left out was that these strategies in aggegregate had come to occupy an important place in the liquidity food chain. As specialists, market-makers, block desks and independant floor traders have stepped away from meaningful liquidity provision morphing towards the predatory, “quant” strategies have – albeit discretionarily – filled the void. Other things the same, they dampen vol and lubricate markets from excess. BUT…turn even a few of the larger participants from reversionary providers to momentum demanders of liquidity, and it quickly becomes clear that there are behaviourally precious few other liquidity providers. Markets, and remaining participants will of course adapt eventually, but the initial removal of such a structural keystone has supremely disorienting and dislocating impact. If you liquidated an equivalent amount of fundamental capital, or indexed capital in late Jul and early Aug, the ripples would have been barely noticed and certainly not caused a cascade. But put the liquidity-providers in the penalty box, or remove them altogether, and mayhem ensues.

As for the factor -based Quants, it strikes me that the more factor-based you get, the more you stop being a “Quant” per se; at a certain point you become more of a Fundy guy who does a lot of program trading. The shift from high turnover pure statistical mean reversion strategies to pinpoint strategies trying to find “value” is exactly the shift in the market I am talking about.

Factor based quant investing is just a Fundamentalism manqué, if you ask me.

These are best thought of in an ecological framework. Strategies that are underused relative to their carrying capacity earn excess returns. Overused strategies relative to carrying capacity underperform.

One thing that intelligent quants should have is a forecast of likely returns, which they should use to benchmark the attractiveness of the trade. If they are anticipating earning less than the yield on a single-B bond, or whatever they deem the proper benchmark to be, they should not do the trade.