We asked Andreas Sauer, the Chairman of the Membership Committee, about some of the most pressing themes in investing today. He also provides some insight into the benefits of becoming a member of Inquire Europe.
1. The 2020’s have been marked by unforeseen volatility (Covid-pandemic, war between Russia and Ukraine, Bank failures). How do you apply rationality to such a volatile market backdrop?
Markets,and life in general, are unfortunately subject to unpredictable events. This should not prevent us from making rational, informed, and thoughtful decisions, especially as portfolio managers. The reaction of the markets to all these events has always been rational – each event has significantly increased economic uncertainty and this has increased risk premia going forward through falling prices. The initial reaction may have been an overreaction, but this can only be judged in hindsight. What has been interesting over the past three years is that the expected economic downturn has been shorter and far less severe than expected, at least for the time being. As a result, markets have recovered faster than expected. But again, this reaction was rational in the light of economic developments. In summary, markets can and do overreact in the short term, but over the medium to long term, markets reflect economic developments. In this sense, markets are much more rational than is generally believed.
2. How is AI changing the Quant investing landscape?
I started my Quant-career three decades ago. At that time, our biggest challenge was to find good and valid data, especially for a global asset universe. Computing power was also a constraint, e.g. for optimising a portfolio of global equities. Both obstacles have since disappeared, but the task of forecasting asset prices based on the information available today is still the same. Quants have always used models to analyse data and tried to use these models to forecast markets. In that sense, I think everything we are doing with AI today is an evolution of what we have been doing for a very long time. It is an evolution and not a revolution for two reasons. First, investment management is not a big data problem. There are 250 trading days a year, and even over 50 years that gives you only 12,500 data points for a stock index. This is ridiculously small compared to the clouds of data that are used in AI applications today, such as ChatGPT, which claims to have around 175 billion parameters and a data set of several hundred terabytes. Second, and more importantly, in capital markets there are unfortunately very few comparable occurrences of the same relationship, and thus little replicable causality. While events on the capital markets often seem easy to explain in retrospect, tomorrow’s stock prices can only be predicted with limited accuracy. And more data doesn’t help. AI will therefore improve data analysis and open up new (alternative) data, but it will not disruptively change the investment landscape in the foreseeable future.
3. You are the Chairman of Inquire Europe’s Membership Committee. What are the most valuable benefits about becoming a member?
I’ve been a member of Inquire for over two decades. The combination of a quant-minded investment community meeting twice a year for an intimate and highly professional seminar is absolutely unique. Our seminars uniquely combine high-profile speakers from academia and business, and enrich the two-day experience with great social events that make it easy to network with colleagues from across Europe. In short, I cannot think of a better environment to keep abreast of developments in our industry while networking with like-minded colleagues.