More investors mull quant model use in private assets

^{By Hugh Leask}

More than half of investors anticipate quantitative techniques to be applied to less liquid assets such as private equity and real estate, as market participants look to expand systematic models beyond traditional sectors like equities and bonds, according to new industry survey by Invesco.

The ‘2023 Invesco Global Systematic Investing Study’ examined how investors are developing and deploying advanced methodologies to build resilient portfolios and generate alpha. 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, and interviewed 30 established systematic fund managers.

The eighth annual survey 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 utilized in private equity and real estate investing.

Systematic approaches have traditionally been considered less easily applicable to alts such as private equity and real estate, owing to the more illiquid and less transparent nature of the asset class, along with a lack of readily quantifiable and consistent data.

Underlining this perspective, the research found that while 98% of survey respondents currently use a systematic approach to equities in their portfolio, with 73% using a systematic approach to fixed income assets, barely a third (32%) deploy systematic investing for their private equity portfolios.

However, more than half (55%) said a systematic approach could be used for private equity investing.

Similarly, while only 31% currently use quant systems for real estate investing, 54% believe a systematic approach could be used here. Less than a third (28%) use systematic tech in infrastructure assets, but more (49%) see opportunities for quants here.

“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 looked at how investors’ are expanding their systematic strategies’ scope beyond factor-based investing – seen as the cornerstone of quant funds – and into areas such as dynamic asset allocation, multi-asset analytics, derivatives- and options-based risk mitigation, ESG, and AI/machine learning.

Here, the analysis noted how market participants are looking to better understand factor exposures of private market investments and to gauge the impact of a global shift towards private markets on the performance of traditional investment factors.

One EMEA-based institutional investor quoted in the report said: “A lot of the larger institutions are now looking for value in their alternative portfolios via private equity or infrastructure. This then has implications for the attractiveness of value in listed markets. Understanding these kinds of dynamics is becoming more important as alternatives grow to become a greater proportion of portfolios.”

AI’s influence?

Elsewhere, the wide-ranging study examined how the use of artificial intelligence – both to boost risk management and generate alpha for investors – has surged among investors.

Roughly 45% of institutional allocators, and 50% of wholesale investors, now incorporate AI into their investment processes in some form, with 10% of institutional investors using it extensively. The most common current use is identifying patterns and trends in market behaviour, cited by 46% of respondents. Meanwhile, 38% use AI to optimize portfolio allocation and risk management, with 29% utilizing it to develop and test investment strategies.

Some 41% of respondents use natural language processing for sentiment analytics, with three-quarters expecting to use it in future. Looking ahead, three-quarters (75%) of those surveyed expect AI to match or exceed importance of traditional investment analysis within a decade.

“Investors particularly appreciate AI’s potential for risk management, its ability to help forecast and prepare for the unexpected, and its potential to mitigate human biases which might otherwise prevent proper exploration of tail risks,” Invesco said.

_{This article, “More investors mull quant model use in private assets” was originally published on November 7th, 2023 on Alternatives Watch and is republished here with permission from BMV Digital, Inc.}