Managed Futures Strategies: Inside the “Black Box”

What are quantitative strategies?

Quantitative, or “quant,” strategies select securities based on prespecified sets of rules. These rules are based on quantifiable evidence, informed by a combination of proprietary analysis and academic research. Quant strategies are then executed based on where current prices are trading relative to the rules of the quantitative framework. For example, a simple quantitative value strategy may rely entirely on a quantifiable measure of value (e.g., price-to-book ratio), rather than on the manager’s forecast of the future price to instruct buy or sell decisions. In this way, quant strategies differ from discretionary strategies, which consistently rely on the skill of the investment manager to make investment decisions at every step of the way.

Are all quant strategies “black boxes”?

While it’s true that some quant managers consider specific details of their implementation strategy proprietary and are not willing to disclose their “secret sauce,” not all strategies rely on top-secret algorithms to make money. In fact, the majority of quant strategies are based on widely understood principles and well-researched pricing anomalies, such as momentum, value and carry, which are difficult to time and are best accessed through a rules-based approach. Managed futures strategies focus on momentum through a rules-based approach, rather than an opaque “black box.” Though managers typically don’t publish all details of their rules, they are generally relatively transparent regarding the substance of the models, making these strategies more like “glass boxes” than “black boxes.” Additionally, managed futures is often offered in liquid and relatively transparent structures.