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.
2:45 – (First question) – A look at Leigh’s early career and how he got started in investing
5:39 – Leigh is asked to describe the inefficiency in sell-side analysts’ estimate set
8:04 – What happened when things stopped working towards the end of 2007.
9:35 – The proper dimensions to separate any sort of potential Alpha edge
11:15 – The traits that help a fund perform well
14:05 – Force Rank (App)
14:49 – How the scientific process plays into Leigh’s research strategies
19:18 – Explain what Estimize is and what it does
20:55 – How people are compensated for the estimates
23:33 – The scale of how many estimates they get per company
24:57 – Why you need to be part of this informational arms race if you hope to survive
28:30 – What happens if everyone buys Estimize data and the Alpha built into it goes away
31:04 – What has been the evolution in these hedge fund platform type companies
35:00 – If Leigh was designing a firm from scratch, what would it look like
37:25 – Understanding Numerai and crowdsourcing in funds
41:41 – What is an example of interesting data set that Leigh as come across
45:38 – 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 Crash
58:16 – 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 rates
1:07:50 – What is Leigh most excited about the future
1:13:15 – Kindest thing anyone has ever done for Leigh