Applications ofbehavioural finance in quantitative modeling

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Nov 18, 2013 (3 years and 6 months ago)

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For professional investors

Applications of

behavioural finance in quantitative modeling

Eoin Murray: Head of Quantitative Strategies


November 2005

2

OMAM

>
A rapidly growing specialist investment manager; focused on high performance and
absolute return products


>
Independent investment teams; centralised risk management


>
US$7.7 billion assets under management*


>
Backed with seed capital by Old Mutual plc, a FTSE 100 company



* Source: OMAM, as at 31/10/05.

3

Business platform

Equities

Investment teams

Business infrastructure

Legal

Risk

Management

Marketing


Investment

Operations

Systems

Manager

Recruitment

Product

Development

Seed

Capital

Finance

Business

Management

Clients

Investor Relations

Distribution

Fixed

Interest

Quantitative

Strategies

Multi Strategy

Products

4

Quantitative strategies

>
Global and regional equity long
-
only

>
Multi
-
asset class

>
Global equity market neutral

>
Global equity long/short


Products in development

>
Global macro

>
Technology long/short fund

>
Volatility arbitrage

5

Quantitative strategies

>
Experienced portfolio management team

>
In depth and focused research team

>
Currently manage nearly US$2bn in quantitative hedge fund strategies

>
Proven process

>
Existing framework

>
Track record:

Old Mutual Global Equity Market
Neutral Fund Limited

> Launch: December 2001

> Annualised performance: 7.3%

> Annualised volatility: 4.2%

> Sharpe ratio: 1.3

Old Mutual GEM Plus Fund
Limited

> Launch: May 2003

> Annualised performance: 12.5%

> Annualised volatility: 6.8%

> Sharpe ratio: 1.5

Source: OMAM, as at 31/10/05.

6

Investment philosophy

>
Market inefficiencies result from behavioural biases and structural anomalies

>
Investment insights, not statistics, drive research

>
Rigorous backtesting of data to validate investment criteria

>
Continuous research to maintain and enhance Sharpe ratio

>
Multi
-
factor models designed to perform throughout the business cycle

7

Are there systematic patterns we can exploit?

>
Systematic patterns


affect all stocks in aggregate


appear as behavioural biases

-
based on psychology

-
investors are sometimes irrational

-
persist due to limits to arbitrage

8

Behavioural biases …

>
Overconfidence


people are generally overconfident of their own judgement


>
Limited attention


there are limits to the amount of information we can process


>
Prospect theory


attitudes to risk are not symmetric


9

… lead to investment insights

>
Differences of opinion (overconfidence)


stocks where investors disagree more will be further overpriced and
earn lower future returns


>
Earnings quality (limited attention)


investors tend to focus on the quantity rather than the quality of
reported earnings


>
The disposition effect (prospect theory)


investors predisposed to sell past winners in preference to past losers



10

Ongoing research

V
-
Lab

Academic Advisory
Board

Broker research

Quantitative

Strategies team

Idea generation

Investment intuition drives the process

11

Change control process

Formalised procedure

12

Global Equity Market Neutral

Investment process

Trade list

Trade

cost

model

Relative

return

model

Risk

model

Optimisation

and portfolio

construction

Continuous research on
all three proprietary
models and process

13

Academic consultants

Dr Nicholas Barberis

Professor of Finance

Yale School of Management

Previously, Nick was an Associate Professor of Finance at the University of Chicago Graduate School of Business; he
has also held visiting professorships at Harvard University and at London Business School. B.A. (mathematics),
Cambridge University, 1991; Ph.D. (business economics), Harvard University, 1996; Publications include Style Investing
(with A Shleifer), Journal of Financial Economics (2002), and A Model of Investor Sentiment (with A Shleifer and R
Vishny), Journal of Financial Economics (1998).


Dr Peter Pope

Professor of Accounting and Finance

Lancaster University Management School

Previously he was the Touche Ross Professor at Strathclyde Business School and visiting professor at the Stern School,
New York University and the University of California at Berkeley. He is the Academic Co
-
ordinator of the Institute of
Quantitative Investment Research and a member of the UK Accounting standards Board Academic Panel.


Dr Stephen Satchell

Reader in Financial Econometrics, and Fellow of Trinity College

University of Cambridge

Academic Advisor, Alpha Strategies; Advisory Panel, IFC (Subsidiary of the IMF); U.K. Representative, Pension Research
Institute (State University of California); Fellow, Pensions Institute (Birkbeck College); Visiting Professor, City Universit
y;
Visiting Professor University of Technology, Sydney; Visiting Professor Birkbeck College; Visiting Lecturer, University of
Oxford, applied mathematical finance diploma.

14

Academic consultants (cont’d)

Dr Lionel Martellini

Professor of Finance and Director Research

EDHEC Risk and Asset Management Research Centre

Lionel Martellini is a Professor of Finance at EDHEC Business School and the Scientific Director of the EDHEC Risk and
Asset Management Research Centre. A former member of the faculty at the Marshall School of Business, University of
Southern California, Dr. Martellini conducts active research in quantitative asset management and derivatives valuation.
He is on the editorial board of the Journal of Alternative Investments and the Journal of Bond Trading and Management,
and on the editorial advisory board of the Journal of Portfolio Management.


15

Regulatory information

This

document

is

being

issued

inside

and

outside

the

United

Kingdom

by

Old

Mutual

Asset

Managers

(UK)

Limited

(‘OMAM’)

(which

is

regulated

by

the

Financial

Services

Authority

(the

‘FSA’))

only

to

and/or

is

directed

only

at

persons

who

are

both

a)

intermediate

customers

or

market

counterparties

for

the

purposes

of

the

FSA

Conduct

of

Business

Sourcebook

(‘COBS’)

and

b)

of

a

kind

to

whom

the

Fund

may

lawfully

be

promoted

by

a

person

authorised

under

the

Act

(an

‘authorised

person’)

by

virtue

of

Section

238
(
5
)

of

the

Financial

Services

and

Markets

Act

2000

(the

‘Act’)

and

Annex

5

to

Chapter

3

of

COBS
.

The

shares

in

the

Old

Mutual

Global

Equity

Market

Neutral

Fund

Limited

and

the

Old

Mutual

Gem

Plus

Fund

Limited

(the

‘Funds’)

are

only

available

to

such

persons

and

this

document

must

not

be

relied

on

by

any

other

persons
.

This

document

is

exempt

from

the

scheme

promotion

restriction

(in

Section

238

of

the

Act)

on

the

communication

of

invitations

or

inducements

to

participate

in

unregulated

collective

investment

schemes

on

the

grounds

that

it

is

being

issued

to

and/or

directed

at

only

the

types

of

person

referred

to

above
.

Any

recipient

of

this

document

who

is

not

an

authorised

person

may

not

distribute

it

or

otherwise

promote

the

Funds

to

any

other

person
.

The

Funds

are

unregulated

collective

investment

schemes

for

the

purposes

of

the

Act

and

the

rules

of

the

FSA
.

The

Funds

are

registered

as

regulated

mutual

funds

with

the

Cayman

Islands

Monetary

Authority

under

Section

4
(
3
)

of

the

Mutual

Funds

Law

(
2001

Revision)

of

the

Cayman

Islands
.

The

investment

activities

of

the

Funds

will

not

be

regulated

or

otherwise

overseen

by

the

Cayman

Islands

Government
.

The

information

in

this

document

should

not

be

construed

as

a

solicitation

to

invest

in

the

Funds

or

be

relied

upon

for

the

purpose

of

making

an

investment

in

the

Funds
.

Before

investing

in

the

Funds

prospective

investors

should

read

the

Fund

prospectus

and

consult

with

their

own

professional

advisors

on

the

suitability

of

such

an

investment
.

Investors

may

rely

only

on

the

information

contained

in

the

Fund

prospectus

for

which

OMAM

takes

no

responsibility
.

Please

remember

that

the

value

of

an

investment

and

the

income

from

it

can

go

down

as

well

as

up

and

that

you

may

not

get

back

the

full

amount

invested
.

Past

performance

is

not

a

guide

to

future

performance
.

Exchange

rate

fluctuations

can

also

affect

both

capital

and

income

values
.

Old

Mutual

Asset

Managers

(UK)

Limited

is

the

investment

manager

of

the

Funds

and

is

authorised

and

regulated

by

the

Financial

Services

Authority
.

Old

Mutual

Asset

Managers

(UK)

Limited,

2

Lambeth

Hill,

London

EC
4
P

4
WR,

England
.

Registered

in

England

No
.

2949554

H825/11/05