Several weeks ago my conversation with Leigh Drogen on quant investing proved timely and popular--because everyone in asset management is facing the rise of big data, and the use of data science in investing strategies. Because of the rise of quants, many are asking themselves how to survive and thrive in a changing industry. In short, how can traditional managers compete with quants? This second conversation with Leigh was set up to answer many of the questions posed in the first one. If quants are taking over, what should other investors do about it? Leigh proposes a method by which old school asset managers can restructure their thinking and their process to compete with and even beat purely quantitative competitors. The method involves pulling the best from both worlds and combining them into a hybrid structure. But it will be impossible without a wholesale change in mindset, which is where we begin. Please enjoy round two with Leigh Drogen.   Links Referenced Revenge of the Humans Part II: A New Blueprint For Discretionary Management   Show Notes 2:14 – (First question) –  What role will ego and mindset play for traditional hedge funds looking to transition into quantitative investing strategies 4:21 – Describes the traditional process that hedge funds use to make investment decisions and how the internal politics can hamper it 6:08 – What value has portfolio managers played at hedge funds traditionally as the quarterback of a fund 9:57 – A look at what Leigh has seen as he sits with teams 12:20 – A look at places that have tried to simply add quant to their firm’s strategies without “tearing it down to the studs” and properly integrating them into the process 15:00 – Leigh is asked to define the basics of a good investment firm’s strategies 16:57 – Strategies for writing down core beliefs, whether it’s for yourself or your firm 17:49 – Exploring the second step, finding a differentiating view and how to succeed with it. 21:43 – The importance of force ranking and structuring the unstructured 26:14 – Building factor models 29:42 – How the portfolio manager position should have less room for subjectivity than at the analyst level 33:44 – Is anyone integrating this kind of high level data at the portfolio manager level into the decision making the way Leigh describes 35:07 – What blind spots are created by systematizing their processes 36:18 – Why much of this applies more to shorter and structured periods 38:23 – Shifting to portfolio constructions and what Leigh would do to create the right mix 43:39 – Shifting to management structures in these firms starting with the role of the CIO 45:24 – Looking at the different quant roles that exist in a firm and what they should be responsible for; data engineers, data analysts, pure quants, and quantitative engineer 48:20 – If you are an undergrad or grad student right now interested in asset management, what are the roles you should be thinking about targeting 49:25 – Why communication skills are still so important, no matter what role you are in 50:25 – With all of the tools and skills that Leigh has at his disposal at Estimize, why not institute an active strategy 52:01 – What has Leigh observed in the dispersion of skill in the Estimized data set 53:47 – What is the relationship between specialization and accuracy among funds 55:29 – The pros and cons of the generalist 56:56 – A look at Leigh’s background into War Theory and what lessons that he still draws on today 1:00:19 – How the field of study around war and battle relates to the investing world   Learn More For more episodes go to InvestorFieldGuide.com/podcast.  For complete shownotes, go to InvestorFieldGuide.com/leigh.  Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on twitter at @patrick_oshag

I’ve often joked that this show should be called “this is who you are up against,” because I am so often having conversations with brilliant people across the investment landscape who are effectively my competition and yours. This week’s conversation fits that description because it gives you an inside view into how things work among some of Wall Street’s most competitive investment firms. My guest is Leigh Drogen, who has worked as a statistical arbitrage portfolio manager and who founded and now runs Estimize, a data company which works with some of the world’s largest hedge funds.Our conversation centers on the massive shift from what we call discretionary portfolio management—basically stock picking—to a landscape that is increasingly dominated by quantitative investors of various types. We talk about how any investor might hope to earn alpha, and how doing so is harder and harder.There are so many great stories in this episode, told by someone with the perfect career experience to know how the system actually works. After many episodes where I’ve been learning on the fly about topics like venture capital, permanent equity, or health, this episode marks a return to my world of quantitative investing. I think you’ll learn a lot, and that you’ll likely finish with an even deeper appreciation of just the type of investors that we are all up against. Books Referenced Revenge of the Humans: How Discretionary Managers Can Crush Systematics Links Referenced The Undoing Project: A Friendship That Changed Our MindsForce Rank (App) Founder of Estimize Explains How He Plans To Disrupt The World Of Wall Street Research Show Notes2:45 – (First question) – A look at Leigh’s early career and how he got started in investing3:13 – Revenge of the Humans: How Discretionary Managers Can Crush Systematics8:04 – What happened when things stopped working towards the end of 2007.9:35 – The proper dimensions to separate any sort of potential Alpha edge11:15 – The traits that help a fund perform well11:42 – The Undoing Project: A Friendship That Changed Our Minds14:05 – Force Rank (App)14:49 – How the scientific process plays into Leigh’s research strategies19:18 – Explain what Estimize is and what it does20:55 – How people are compensated for the estimates23:33 – The scale of how many estimates they get per company24:57 – Why you need to be part of this informational arms race if you hope to survive28:30 – What happens if everyone buys Estimize data and the Alpha built into it goes away31:04 – What has been the evolution in these hedge fund platform type companies35:00 – If Leigh was designing a firm from scratch, what would it look like37:25 – Understanding Numerai and crowdsourcing in funds41:41 – What is an example of interesting data set that Leigh as come across45:38 – What is the potential for a hybrid model between a quant only with a discretionary picker.51:35 – How do you know when something is busted or broken?55:33 – Exploring his most memorable individual day in his career – Flash Crash58:16 – With all the algorithms and automation, will we continue to see more of these unforeseeable dislocations like the flash crash?1:01:00 – Bloomberg article about passive investing rates1:07:50 – What is Leigh most excited about the future1:13:15 – Kindest thing anyone has ever done for Leigh           1:13:41 – Founder of Estimize Explains How He Plans To Disrupt The World Of Wall Street Research Learn MoreFor comprehensive show notes on this episode go to http://investorfieldguide.com/drogenFor more episodes go to InvestorFieldGuide.com/podcast.Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub.Follow Patrick on Twitter at @patrick_oshag