Brian Hayes, Morgan Stanley
We survey quantitative equity strategies, highlighting differences in their data sources, holding periods and return characteristics. We then examine overlaps of quant equity portfolios relative to a model that allows increasing popularity of stocks with market cap, but assumes funds otherwise select stocks independently. We test the model on cross-strategy overlaps - where stocks are chosen via distinct criteria - then apply it to intra-strategy overlaps of equity market neutral (EMN) funds. In both cases, the model gives a good fit to the observed overlap distribution, indicating that overlaps of EMN funds are consistent with independent stock selection. Our results suggest that herding of funds into the same stocks may not have been responsible for the August 2007 Quant Equity Crisis.
Since summer 2007, EMN funds have generally struggled. This difficult period continues a longer trend of declining performance. We examine potential causes of this trend, including a structural break coinciding with the implementation of Reg FD. Despite moribund returns, regime-switching models indicate the HFRI EMN Index has likely been in a "good" regime since spring 2009, although this probability has fallen recently
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