Numeric's Investment Strategies

Numeric's investment strategies

Before I assess the future of numeric investors l.p., I think it is crucial to understand their current investment strategy and the implications of their strategy on their competitive environment.

By the time numeric was founded in 1989, Lang had found the blue ocean in portfolio management. On the market for asset management firms many firms with traditional investment strategies competed for assets to manage. Rather than participating in the fight for clients in this red ocean, Lang developed the momentum model, which became the basis of numeric's investment strategy. Right from the beginning numeric deviated from the fundamental investment approach and built a long/short investment strategy. By doing so, numeric committed itself to short-term actions in order to optimize the value of its funds. This strategy differs significantly from the traditional asset management approach. Traditional asset managers maintain long-term contacts with the top management of the companies whose stocks are part of the funds' portfolio. A typical portfolio manager that invests according to traditional active asset management, has between 30 and 50 stocks of different companies in its portfolio and holds those stocks over a long period of time in order to outperform the benchmark portfolio on a time horizon over multiple decades. Value is generated from deep understanding of publicly available company information. Often individual portfolio managers are held responsible for investment decisions which are mostly decided by themselves without the advice of an investment committee or the usage of an advisory tool. Numeric's approach to portfolio management is fundamentally different. Although individual employees are not responsible for their own for investment decisions, since their quantitative models back their decisions, the long/short approach creates sleepless nights. As soon as a fund contains short positions, a long term focus is not possible anymore, because shorting securities of a company creates tension between the asset manager and the companies' management. Portfolio managers who rely on long term relationships with companies whose securities they hold in order to understand the long term outlook for this company, can not afford to short securities of that companies for short term gains, otherwise they would loose their relationship and along with it the ability to interpret future information in a better way than the market. Numeric's investment strategies however rely on proprietary computer models that analyze fundamental information about stocks and exploit market inefficiencies. The work for a portfolio manager at numeric is therefore significantly different than the work of a traditional asset manager. At numeric analysts and portfolio managers are responsible to get the information needed to feed the quantitative models quickly enough before