Quantitative investing and research offers investors powerful tools to meet their goals. For many years, however, quantitative investing had been mostly within the realm of private, high net worth investors and institutions.
Many mutual funds have since launched, offering the broader investing public access to quant strategies. Federated Hermes is one such name therein. The issuer is looking to set itself apart including with its recently filed quant-related ETFs.
Digging Into Quant Investing
The firm works with its quant shop, MDT Advisers, to hone a quant approach crafted over several decades. Federated Hermes acquired MDT Advisers in 2006, when the company already offered a few style-specific funds. Now, building on those quant-driven funds, it has filed for four active ETFs managed by its MDT team.
For example, Federated Hermes Funds has filed under the Federated Hermes ETF Trust for the new Federated Hermes MDT Large Cap Growth ETF. Per the filings, it would lean on a quantitative model “driven by fundamental and technical stock selection variables.”
While not speaking specifically to the filings, Federated Hermes MDT Advisers head Dan Mahr spoke to the shop’s quantitative approach. For Mahr, consistently beating a benchmark doesn’t just need a quantitative approach; it needs to combine the best of quant approaches.
“What you really need is to not be relying on any one edge in the market. You need to be relying on a multitude of edges,” he said. “If there were any one edge that beat the market and did so consistently, everyone in the world would walk to the strategy and it would quickly disappear.”
The shop places a heavy emphasis on decision trees in its quantitative investing process. Mahr explained that the firm has used decision trees since 2001. Traditional quantitative regression tools didn’t provide flexibility for dealing with the different ways that different data points impact companies.
“It’s very intuitive as a human being, a stock analyst, to say ‘of course you ask different questions of different types of companies,” he explained. “Amazingly, a lot of quant approaches don’t really take advantage of that feature.
Decision Trees
For example, a decision tree can help address a quantitative bias toward value investing, Mahr noted. Different branches of the tree or trees can apply quant ideas to different investing styles.
Having that clear step-by-step process has also allowed the firm to hone its process over decades. With the explosion in popularity of active ETFs, limiting tax impacts from traditional turnover-heavy quant strategies, quant investing can increasingly arrive to portfolios in the ETF wrapper, too.
“I think an active ETF is a great wrapper for a quant strategy,” Mahr said. “One of the knocks against quant investing that we often come up against is that most quant strategies are fairly high turnover, and because of that, [they]tend to pay out frequent tax distributions.”
He explained that quant strategies can play a role in all kinds of portfolios. Investors interested in Federated Hermes quant strategies may want to keep an eye out for ETF launches potentially later this year or in 2025.
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