Quant blended with cryptocurrency sounds like a cocktail poured in hell. But behind closed doors, a few intrepid souls in the investing world are starting to drink it.
Part academic exercise, part arranged marriage of Wall Street fads, a handful of theorists and traders are looking at what investment factors like momentum and value can tell you about — yep — the price of bitcoin. Factors, the wiring behind smart beta exchange-traded funds, already revolutionized equities, proving that groups of stocks with traits like cheapness and low volatility return more than the market as a whole.
That discovery was a gold mine, launching $700 billion in smart beta ETFs, so it’s no surprise people want to turn it loose elsewhere. A more abstract motive hearkens to the foundation of quantitative investing. It’s the idea that no matter where you look — stocks, bonds, ICO tokens — mental mistakes by investors cause the same trading opportunities to arise in every market.
In the theory camp is Stefan Hubrich, the director of asset allocation research at T. Rowe Price Group Inc., who set out to publish the first academic paper linking factor anomalies to blockchain assets. After building models and analyzing data, Hubrich says he can show that factor investing beats a simple buy-and-hold strategy in digital tokens.