130: RQI Investors' David Walsh – Is A Quant Winter Coming?

In this episode, I'm speaking with David Walsh, who is the Head of Investments of RQI Investors, a First Sentier fund manager. And we delve into the concept of a Quant Winter. Some market participants argue a new Quant Winter is in the making, since growth and momentum factors are compounding with limited breadth, driven partly by the promise of AI. This can lead to distortions in the market and the collapse of quantitative models. David has tackled this topic in a recent paper, called 'Lessons from the Quant Winter' and we discussed what it is, how likely it is another one is coming, the impact of monetary policy and innovations in quantitative strategies through machine learing and AI. For the full paper, please see here: https://www.firstsentierinvestors.com.au/au/en/adviser/insights/latest-insights/lessons-from-the-quant-winter.html __________ Follow the Investment Innovation Institute [i3] on Linkedin Subscribe to our Newsletter Explore our library of insights from leading institutional investors at [i3] Insights __________ Overview of Podcast with David Walsh, RQI Investors 04:00 From engineering to investing 09:00 What is a Quant Winter? 11:00 Is a Quant Winter a form of mean reversion? 15:00 Do I see another Quant Winter emerging? Probably not. What we are seeing is an anti-value period 18:30 On average value should beat growth, because the market is behaviourally tilted towards growth and overpays for it 20:00 In a high volatility environment, a rotation towards quality is sensible 23:00 A good quant portfolio is not just about established factors, it should be much more about finding idiosyncratic sources of alpha 25:00 You don't want a 100 signals in your portfolio; you want them to be able to breath 26:00 Machine learning let's you build models in ways you couldn't in the past 28:30 How to deal with cost in implementing non-linear signals 31:00 Higher dimensional portfolio optimisation through quantum computing 33:00 Quant Winter versus a recovery 38:00 Is AI in a bubble? "My guess is that the air will come out of the balloon, rather than it popping" 41:30 The extent to which passive or passive-enhanced money has affected the market structure is definitely an issue that has been arising in the past five or 10 years. You can broadly read that the market is becoming less efficient Full Transcript of Episode 130 Wouter Klijn 00:00I Welcome to the [i3] Podcast. I'm here today with David Walsh, who is the Head of Investments for RQI Investors. David, welcome to the show. David Walsh Thank you very much. Great to be here. Wouter Klijn So I understand you studied electronic engineering before you got into the investment industry and specialised in reducing circuits and chips, is that correct? And optical communications? So how do you end up in the investment industry after that? David Walsh 00:28 Yeah, well, that was the topic du jour when I was studying my electronic engineering, way back a long time ago, the idea of what was called, at the time, very large scale integration, which was the idea of taking a circuit board or a chip design, and shrinking it down as small as possible had a lot to do with the way in which the mapping of the transistors on the chip worked, the material science underneath which materials you're going to use. That was very interesting. Also worked and looked at optical communications quite an early part of that industry. A lot of the talk about the fibre technology and loss rates and speed rates and bandwidth and so on, are quite interesting topics that were quite topical at the time. Emerging industries, the material science and the optical technology side, were very interesting, and clearly emerging technologies that have gone a long way since then. I took that and worked in power and mining engineering for a few years after I graduated, not directly in those topics, but used a lot of the ideas and instrumentation design and the like when I when I was in the industry, it doesn't naturally segue into finance, but it's important to think that a lot of the problem solving techniques that you get from being an engineer or training as engineer, the way you approach problems, the technical issues you use, the things you realise you're missing, apply themselves pretty well to a finance study as well. So when I, some sense, moved careers from engineering to finance, a lot of the skills came with me. Wouter Klijn 01:49 So when you talk about shrinking circuits and chips, is that related to like Moore's law, where, you know, trying to get more and more things on the chip and making them smaller, and then that would increase the computer power. Or is that totally off? David Walsh 02:05 Yep, no. Same field, pretty much. The idea there is you can only shrink them down to a certain size, beyond a certain size. It's impossible to to get the chip widths, the better the actual tracks you use for transmitting electrons around the circuit. You can't get ...