July 14, 2008

With a notable increase in the total number of quantitatively driven funds, the pressure to come up with the next big quant model has grown exponentially. Given the fact that certain short-term strategies only remain effective for three to four months, rapid construction and implementation of alpha models becomes much more urgent. Unfortunately, today's market reality is littered with disparate, homegrown third-party applications tied together only by the creativity of the quants.

A new report from Aite Group, entitled "The World According to Quants: Enter Alpha Generation Platforms," focuses on the emergence of alpha generation technology platforms, designed to create a more centralized and streamlined process and functionality, vastly improving the overall productivity of quants. The report suggests that as the pressure continues to mount for faster turnaround in the alpha generation process, the market demand for a single platform to efficiently unify the entire work flow will grow rapidly.

Aite Group estimates that 12% of all global assets under management (AUM) was driven by quant analysis at the end of 2007, representing $6.65 trillion. This figure is expected to reach 14% by the end of 2010, representing $10.86 trillion.

Focusing just on the hedge fund community, rapid growth of AUM in more sophisticated investment strategies has fueled adoption of quantitative investment analysis, accounting for close to 75% of all global hedge fund AUM.

In order to unify the different components and also provide an efficient alpha discovery development environment, a new type of platform has emerged in recent years, which Aite Group has entitled "alpha generation platforms."

The overall market demand for alpha generation platforms will skyrocket over the next few years, reaching close to $120 million by the end of 2011.

As competition in the quant world continues to increase, demand for an all-encompassing platform designed to reduce development errors and time to market is destined to grow dramatically. Those firms that are able to implement a highly efficient process for alpha discovery will gain a significant competitive edge for years to come.

Likewise, as the shelf-life of alpha strategies continues to decrease, driven by competition and changing market conditions, there is growing recognition that the links between alpha discovery and execution cannot be ignored. In short, the alpha investment model must also lead to the implementation of alpha capture execution algorithms.

In order to successfully capture alpha in today's marketplace, firms must be able to collect, transform (normalize) and store massive amounts of data. Quant models can then analyze the data through exhaustive back-testing and simulations. The final actualization leg of the process is also important, as timely and cost-effective execution must occur to be successful in a market characterized by shrinking alpha opportunities.

Fortunately, a new group of alpha generation technology platforms are emerging on the market, helping quants achieve alpha by streamlining processes and functions, and improving efficiencies.

Key characteristics of alpha generation platforms include: an ability to integrate seamlessly with leading data sources and databases for rapid data capture, transformation and storage for analysis; ease of use in creating rigorous back-testing and simulation environment; availability of prepackaged operations, routines, strategies and factors; detailed documentation of model creation process; charting, reporting and visualization tools; a codeless environment for rapid strategy development; and a straight-through processing feature that enables quants to go from idea generation to order generation in a drastically reduced time frame.

The demand for quants and their quantitatively driven alpha discovery strategies will persist as the current march toward cross-asset-class trading continues to increase, and trading narrows even more. In this incredibly competitive environment, technology can give a quant a leg-up on the competition.