The nightmare for investors in both stocks and bonds took a turn for the worse this week as the Federal Reserve shocked markets by raising their projections for interest rate hikes while lowering their outlook for economic growth.
Is there anything that works in this environment? The chief investment officer of PGIM Quantitative Solutions joined the "What Goes Up" show to discuss some quant strategies that have held up. The highlights were lightly edited. You can either listen to the full show or subscribe on Apple's Podcasts.
In a year when little else has worked, trend- following strategies have done well. There is a solution from a quant perspective. What do you tell those clients who want to get some kind of return this year or protect their wealth?
There are several offerings that focus on trend following or global macro strategies. The ones have been very successful. The perfect economic environment has big movements and some big inconsistencies across the globe. Looking at Japan and how everyone else is raising rates, it's clear that Japan is not. There is more than one thing. Both commodities and real assets are included. Some downside protection would be the last thing I would discuss.
There has been a run-up in commodities and a bit of a correction. There is a lot of research that shows that commodities do well in environments like this. We think that the Fed is going to be successful in controlling inflation, but it will take some time. It won't come down very quickly. There are many opportunities for commodities in a portfolio. That is a single area. Real assets, whether it's real estate or other direct real investments, do very well in inflationary times.
Downside protection is one of the things that we have a lot of discussions about. How do you build a strategy that hedges tail risk while still delivering most of the upside? There are a lot of different solutions we offer. Those are the main subjects that we have been talking about to clients, and we have seen a lot of interest in them.
What do you think will happen with the Fed for the rest of the year?
When he tried to portray a serious view about inflation, he came away saying, "We're going to do it" He may have been too dovish. Even though a number of other Fed speakers were more pessimistic about the economy, we saw a large rally in markets over the summer. He has had to be very clear that they are going to get their job done and that will cause some disruptions. He tried to be a bit more balanced. He has realized that he needs to be very clear about where he thinks things are going.
It is a challenging economic outlook, but it is followed by huge gains in the market. We have had a lot of gains in a short time. It is possible to expect a small amount of give-back in the next couple of years.
Are you interested in natural-language processing? The Fed's message seemed clear. Is there anything more that a computer program can glean from a Fed statement?
Several things are relevant. A lot of people are running very short-horizon strategies, looking at what words he chooses to use and specifically the questions and answers that come out of that, and are looking to get in or out of the market very quickly. You can go in-depth with language processing. You can read a 10-K and analyze a lot of it, but it will take you half a day or a day to do it. Language processing gives you the broadest possible range. Depending on the model you are running, you can do 3000 of these in a matter of minutes. It is relevant due to the breadth and timeliness.
A lot of our knowledge is in writing. People have been creating written texts since the beginning of putting text down on paper. There is a lot of value in the information that comes out. Over the past few years, it has been one of the most relevant areas to get information.
With the help of a person.
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