The transcript from this week’s, MiB: Gary Chropuvka, WorldQuant, is below.
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This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have a special guest. His name is Gary Chropuvka, he is the president of WorldQuant, a highly regarded quantitative investment firm. Gary has a fascinating background, really insightful, 20 years at GSAM, Goldman Sachs Asset Management where he was cohead of the quantitative investment strategies team. GSAM runs a ton of capital and last year, he moved over to WorldQuant which in it of itself was spun out from Millennium Management in 2007. Millennium Management is another giant quantitative hedge fund and WorldQuant runs a nice lug of capital for them.
As innovative as so many different quantitative approaches are, WorldQuant is really stands out — they are an unusual shop, they do a lot of really interesting things led by a very iconoclastic and brilliant founder and CEO, and really this is just a very intriguing and fascinating conversation.
If you are at all interested in quantitative investing, understanding one of the key drivers of markets today or just to get a sense of what people with advanced computer and mathematical degrees think about the financial engineering that’s taking place in the markets these days, you’re going to find this to be a fascinating conversation.
So with no further ado, my interview of Gary Chropuvka of WorldQuant.
VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: Our special guest this week is Gary Chropuvka, he is the president of WorldQuant, a highly regarded quantitative shop spun out of Millennium Management back in 2007. Gary has a BA in Mathematics and a Masters Degree in Financial Engineering from Columbia. He is also on the Board of Trustees of Rutgers University, Gary Chropuvka, welcome to Bloomberg.
Gary Chropuvka, President, WorldQuant: Thank you so much, Barry. Great to be here.
RITHOLTZ: So I’m kind of fascinated by your background. You spent time at the quantitative investment strategies co-heading that at Goldman Sachs and you have your financial engineering degree from Columbia. Any overlap with Emanuel Derman? You seem to have followed his footsteps.
CHROPUVKA: Yes, I actually – I think I predated Emanuel Derman because I was in the program when it first started back in the early 2000s, I did follow Emanuel, I guess to Goldman Sachs and after he had — he was there, but separate paths, but there’s definitely a correlation among the two. I went to Columbia you know, after I joined the quant group at Goldman, there was looking around the space, there were a lot of folks with them pretty advanced degrees and decided to marry the computer science as well as the engineering with some of the business side to be better trained in the quant field.
RITHOLTZ: So you eventually become cohead of quantitative investment strategies at GSAM, what was that experience like?
CHROPUVKA: So I would say, I spent over 20 years in the same group and I really drove what I love about my job which is quantitative investing, it’s something that I have a huge passion for, I love you dealing with data and figuring out problems and there were certainly a lot of investment problems that we dealt with in that group and you really compelled me to go in and join WorldQuant for other opportunities, but you know, while I was at Goldman, did a number of different things on the research side, on the management side, on the product development side, the client-side, and so had a host of experiences that I cherish, had a great time there, learned a ton and now here at the WorldQuant for the last roughly 6 months.
RITHOLTZ: So we are going to talk more about WorldQuant in a few minutes, let’s stick with the big data you referenced at Goldman and elsewhere, you know, big data is almost a cliché these days. How is it used in quantitative investing?
CHROPUVKA: Yes, I would say, you know, when I think about big data and you know, it’s a large term but I would say you know, we’re all consumers not just in the investment on the quant group but this whole concept around big data is affecting each and every one of our lives. We’re all trying to have an information edge, we’re trying to make better decisions, we’re trying to, you know, utilize as much data to make informed decisions of where were spending our time whether it’s things like going on vacation and/or figuring out where — what restaurant you want to go to.
And so, you know, the world has moved beyond things like Zagats (ph) and really try to understand the idea that there’s a lot of things that will provoke what you want to do or where you want to spend your time and where do you want to invest in.
And so the concept of big data is really to take, you know, anything and everything that may be applicable to a company and try to learn from it. And so there’s this massive amount every time we click on something, every time we move there’s all this data that is being captured and really you know, one of the great things about being a quantitative investor is that we have tools and techniques to take all this awesome amount of data which comes in many forms and I could touch on that, but it comes in many forms and convert that into some insight or some informational edge that helps us predict companies or in a particular asset class.
So this whole concept of big data actually is here to stay. I would say it is much broader than the investing business, it is happening, you know, all of our lives, we’re all sitting with phones in our pockets that have massive amount of information and so really the goal of this big data is to create an informational edge to know something that maybe somebody else doesn’t or to be able to leverage in pursuit of learning something else.
RITHOLTZ: So give us an example, how can you use a data set specifically to identify opportunities that other people that aren’t looking at that data might miss?
CHROPUVKA: Sure, so I think there’s tons of data out there that no one can — we take an example of you know, looking through analyst reports and a lot of people read analyst reports and so things you can do is try to pick up on their sentiment.
And so how are analyst starting to change their mind about a particular company, you know, is a pretty common example of you figuring out how you can train a computer to read all of these words that some of these analyst are putting together, that might be one example. Looking at you know, what’s in the newspaper and trying to gauge sentiment around you know what’s popular, maybe what topics are interesting and what companies may be related to those topics and are those topics trending positively or negatively?
Those are some examples of ideas where there’s something out there that you know, may not be coming out of a company’s financial but it’s something that’s happening around the company that might be impactful. So those are 2 examples of items that constituted big data because you’re looking at massive amount of whether it’s research reports or news articles to kind of get a gauge of can I have a better picture of that company’s fortunes?
And I would think, you know one of the things that we do at WorldQuant is it’s not just three ideas or five ideas, there’s millions of ideas of ways to navigate and have a view on a company and big data for just the opportunity, big data along with some great analytical tools to be able to use on particular companies.
RITHOLTZ: So how does that play into things like smart beta or factor-based approaches? Is that something that you can apply large data sets towards identifying new variations on?
CHROPUVKA: Absolutely, I think you re touching on an important component. If we think about the quant industry, it really started with a lot of these kind of let’s call them smart beta or traditional measures of tractors, so thinking about things like value or momentum value being a cheap company relative to its book value as an example, momentum, so if the stock is starting to trend in a favorable direction, we would continue that particular trend.
And so you know, the whole idea around analyzing all this data as quants or the original quant, you really wanted to play off the wall of large numbers and so you had a lot — you had a lot of data, you had information on each and every company, thousands of companies and you try to rank companies by these particular metrics, price-to-book or some measure momentum and you create a portfolio around those, kind of quote unquote “smart betas” and you know, that tried-and-true works over time and I think, as the industry has evolved these smart beta strategies. there is now more interesting other ways of evolving and utilizing things like big data to be able to similarly look at those factors to vary similar ranked companies.
So quants always want to play the breath game meaning spread out their bets have a lot of different views on particular companies, but what the alternative data and big data allows us to do is really play the depth game, to know a lot more about a particular company as opposed to just their price to book.
So back to your original question, the smart beta strategies which are largely common, implementable, absolutely use large amount of data, you know, in a pretty academically proven, you know, well thought out but have been around for many decades.
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RITHOLTZ: So one of the phrases I I’ve been reading about is a variation of that, customized beta, what is customized beta?
CHROPUVKA: Yes, so it is an interesting topic, customization, I would say when we think about — when you think about customized beta in the industry, you know, there are really 2 things that are happening. One is what types of – I will call it bets, would you like to make?
So do you want to bet on value stocks? Do you want to bet on companies that are have higher dividend payers and you’re able to customize what you want to place a wager on. The other part of the customization which continues to be a pretty interesting trend in the industry is there are certain ESG factors that one may want to hold very dear and want to have companies in their portfolios that express the beliefs that they, you know, have and want to express.
So for example, you know, I don’t want to invest in tobacco stocks or I don’t want to invest in you know, something that is going to negatively impact the environment and so, you can with quant tools, you can figure out, okay what are those companies or how do they fall into those categories whether it an industry or the percentage of revenues a company’s going to get from, you know, let’s say emissions and then be able to create a portfolio to identify whether it’s a factor bet around value or momentum and/or different types of exposures that they want.
So for example, things like tobacco or emission so you can customize the what your equity portfolio looks like relative to benchmark or just an absolute.
RITHOLTZ: So let’s look a little bit about what you do at WorldQuant, what does the president of the firm’s jobs responsibility look like?
CHROPUVKA: Great, Barry, and yes, so as president which I’m extremely fortunate to have joined such an incredible team, it’s really 3 things that I focus on. You know, one is overall business strategy, help with the operating in operating in the firm and then add some leadership on the investing — on the investing side.
And really that breaks down into kind of four key elements that you know, in terms of my role and I work very closely with our CEO, Igor Tulchinsky, and really thinking about the following four things. One is vision so you know, where should we be spending our time? I would say interestingly we’ve got roughly over 600 quantitative people and so we feel like we could solve a lot of interesting problems and really one of our job is to ensure that we’re focusing on the right ones to solve.
And so you know, the setting out that vision, keeping people focused, making sure that incentives are aligned, we are allocating resources to tackling the right problems and then remaining focused on those types, speed and one of things that you know in an organization that has over 600 people, you want to make decisions quickly. Igor does a terrific job of leading and I attempt to help him with that in terms of making decisions, making sure things escalate very quickly so that we can continue our focus and our vision.
And then the last thing I spend a decent amount of time on is talent, and you know, how do we acquire talent? How do we promote a culture of collaboration, intellectual stimulation, you know, a lot of quant in general we like to be intellectually stimulated so o how do we continue to do that and create a culture where ideas can be shared and collaborated across the firm.
So those are where I I’ve been spending my time over the last 6 months.
RITHOLTZ: What sort of programs do you have to incentivize your staff?
CHROPUVKA: Sure. So we have many different ways that we try to incentivize our people in terms of the — and what we do for our for our researchers and so we have several different challenges that we have around the world to, you know, to incentivize people’s work and so you know, that is just yet another piece of the puzzle where you know, we’re trying to promote a particular activity or a particular research and be able to, you know, incentivize them, call them out, reward them for — you know, for doing some really good work and so you know, we have many of these.
And I think one of the unique things about this firm is that we have many different competitions, where you know, where people think — our teams can be incented to do different things and to use their mind a little differently and have the right incentive structure to be able to be rewarded for this.
RITHOLTZ: So you are creating these, for the lack of a better word, competitions internally to solve an investing problem or equation or issue and everyone who works in the firm can basically throw their hat in the ring and say this is the way I think we can solve this problem and then you run the tests and figure out who’s the winner on that or is it real-time and hey this is the best results based on your suggestion?
CHROPUVKA: Yes, so we have several competitions around the firm with you know, set incentives for each of them and we kind of have a group of people that try to tackle this and instead of it being relative to others in the firm, they — we’re saying, okay, here’s a particular strategy that we want to spend some time on, let’s see what you can develop and so that’s an area where we have projects that you know, might not fit into the core research that we do on a daily basis, but you know, maybe a little more — you know, a little more after, maybe we are trying to look at different asset class and we want to uncover.
So we realize, you know, the upfront R&D or the research is going to take a little bit longer and so we want to incentivize them to go out and you know, and really think creatively about capturing and we incentivize them accordingly so that they can climb out of their kind of core to really push the envelope a little bit more in terms of – you know, in terms of figuring out something unique.
RITHOLTZ: One of the questions I was going to ask you is “Hey, how is WorldQuant differentiated from other firms?” But things like the accelerated platform, these sound somewhat different than what we typically hear about at a lot of shops, are these common in the world of quant or is this a little more unique to what you guys do?
CHROPUVKA: I think sometimes people may do this you know, for — to try to recruit people and I have heard of people doing that but putting in a systematic way internally I think is something quite unique. I would say when we think about our — you know, our group and really one of the compelling opportunities that — at least I had when I thought of joining and fortunate enough to join WorldQuant is you know, we’ve got over 600 people around the globe, we operate in our 23 offices, 13 countries, so we got unbelievable global diversity.
And so I think that’s you know, one thing that makes us quite unique and so we operate in many different places, we have many different opinions, we’ve always promoted diversity, diversity of thought, diversity of alphas or drivers of return when we invest and so having programs that continue to incentivize people and really create a collaborative and you know, I would say competitive in a good way where work people continue to be intellectually stimulated.
I think that’s really what really drives the firm, the collaboration we just recently did a research tour, a virtual research tour and myself and Igor and a few other of the senior folks did a tour around and it’s unbelievable when people can promote the collaboration, they’re sharing with us some of the research and the first thing they say is I’d like to acknowledge the four or five people that helped with this — with this research project.
And so, you know just the idea around true collaboration, true appreciation for where you are getting assistance from the I think, is what really makes this place a pretty unique place to me.
RITHOLTZ: WorldQuant was spun out of Millennium by Igor Tulchinsky who is the founder and CEO. Tell us a little bit about your boss.
CHROPUVKA: Yes, so when I first met Igor, he was just so intellectually stimulating, I mean a brilliant, brilliant investor, brilliant man, extremely charitable, some of the things that he’s done are just really spectacular and you could see a lot of those on the web, he has written some really interesting books and just his vision, his ability to articulate, you know, where we’re going and collaborate very well.
I would say the other thing that is just very impressive is his decision-making and I think I’ve observed a lot of quants over the years, you kind of get into the analysis paralysis, you know the there’s always another test you can run on something. Igor, to his credit, is a decision-maker and it is — it’s just great to be able to partner with him for 6 months, for the last 6 months and you know, I look forward for many, many years and decades to come but he is someone who really does make decisions, takes in all the information, and has really built an unbelievable business here at WorldQuant.
RITHOLTZ: So when I normally speak to us and I say hey “What’s your firm’s investment philosophy?” usually I get a sentence that sums everything up in one nice little soundbite.
I get the sense that you’re operating a whole lot of different approaches, it might be a little harder to pin you down to one philosophy of the firm, what is WorldQuant’s investment philosophy?
CHROPUVKA: So WorldQuant’s investment philosophy is really, you know, pretty simple, global, leverage our people, and provide them the tools and technology to make returns for our investors. I mean that’s really you know in a nutshell, you know, what we’re trying to do.
We a very systematic way in which we do it. We try to leverage the law of large numbers and have millions of different alphas that we can leverage, we put them together in a portfolio and then we execute and make them a reality for trading.
So you know the investment processes is quite simple and straightforward but the uniqueness of our philosophy is that we are extremely global in terms of our people, we do believe in playing the breath game (ph) we have a lot of alphas, a lot of ways to look at companies and we try to leverage that through our process and create portfolios that drive return for our clients.
RITHOLTZ: So let’s talk a little bit about the past year which was some people have called it unprecedented. When you’re crunching numbers to explain find a pattern, how can you deal with the possibility of events which have simply never occurred before?
CHROPUVKA: Barry, that is a terrific question. You know, that really separates the “quants” and the “quant investors” and so you know, one of the things that makes our job so interesting I find is the ability to adapt and really to be market practitioners as well as quant and I think that really makes great quant investors.
So you know, we think about 2020 and also in 2021 thus far, you know, we’ve seen obviously unprecedented events, you know, whether it’s around COVID or you know, other types of events that have happened over the last year which ramifications have caused because very large moves in kind of common, let’s call them factors or expressions or buckets of particular stocks or characteristics of stocks.
You know, for example, you know, things like momentum we talked about before, value, these have had some pretty unprecedented moves and there’s been, for value, about 15 standard deviation moves that are that were about two in 2021, just massive moves when you think about a simple five standard deviation move means that that happens once — one day every approximate 14,000 years. So to your point, there’s been no shortage of massive moves largely because there’s been such a big shift.
And so I think as quant investors, the way we try to approach it is to adapt as quickly as we possibly can for some unforeseen event, obviously we try to predict whatever we can in advance but to the extent that, you know, you have something like COVID, you want to think about companies that are going to be largely affected because of that. And there’s two approaches, one is you can try to risk manage which is usually what we would do which is and this is a once-in-a-lifetime event, let’s try to immunize our portfolios from those, so whether you know it’s a — it helps or hurts stocks, let’s try to immunize ourselves.
And the other is to say, okay, let’s try to get a sense whether there’s going to be some type of trend here or there is some ability to create alpha or some excess returns when these events happen.
So you know, you can think about binary events, so things like elections that have happened and what the ramifications are, you can think about things like trade, you could think about companies exposure to things like bitcoin when they announced, and you do about it.
And so we think about the world in characteristics, so we called them factors and so you can create these “factors” and say I want to have a portfolio that whether those sectors do well or poorly, I’m my portfolio will not be affected.
So that’s really the way we thought about a lot of 2020 and in 21 and our investment team has just done a terrific job of being able to navigate that and identify some of these risks that they haven’t seen before. We try to codify it in a systematic way and then focus our attention on no where we believe we can make money, and that’s a lot of these millions of alphas that we believe have been contested for years.
So that is how we think about dealing with companies’ unprecedented moves that we’ve seen in things like sure interest and momentum and value that have happened over the last 12 months or so.
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RITHOLTZ: So I’m intrigued by the concept of something that so many standard deviations away from the norm that it’s really a one in 14,000 year event. Those sort of tail risks, how can we anticipate them on a quantitative basis and more specifically think back to January 6 and the attempted insurrection in the US capital, how can you quantify that and we’ve learned since that that actually came pretty close to I don’t know if I would call it successful, but pretty close to having the rioters access various people in Congress, maybe even the vice president .
How do you factor that into your analyses?
CHROPUVKA: Yes, so I will take it up a step in terms of just in general, how we think about it, but it’s really about trying to identify things that will impact companies and what are the ramifications and I think that’s really the way we try to think about that.
So in that specific case in terms of what would happen to particular companies, those events are relatively quick moves, we try to be very diversified in many different ways and that is probably one of the first times I have used that term but I would take the diversification point is so critical in investing whether you are a quant investor or you are any type of investor, it’s definitely an extremely helpful attribute when you have events like this occurring.
So you know, creating different ways to look at risks as quickly as you possibly can in adapting a portfolio, you know, we think leads to a very successful outcomes in the long run.
RITHOLTZ: How do you guys look at what was taking place with things like Robin Hood and Reddit, to me that was reminiscent of you know late 90s action although it certainly was faster and maybe more powerful than we’ve seen in the past.
How do you look at these sort of group behavior that social networks can foster?
CHROPUVKA: Yes, again, we — so I think, we look at in terms of, you know, from a liquidity standpoint, you know, what are the and how is it affecting the amount of — the amount of ability to trade our securities, you know, we really do try to minimize that I mentioned earlier, we try to minimize the amount of risk we take from any particular factor in things like, you know, short interest is something that you know, is a pretty common factor that you know folks like us would try to identify and minimize, or, you know how much our stocks will move because of that.
I think you know, big picture thinking about liquidity, there is a big retail input to liquidity, they tend to trade stocks that are that are relatively cheap in price and I think there’s some pretty interesting data around that.
I would say for you for all purposes, you know, we look at things like liquidity and depths of market and how that is being impacted and I would say over the last 12 months, you know, interestingly, the world of market microstructure has gotten pretty complicated you know, to the extent you could trade, you could trade you know, ABC stock in 40 different venues in the US.
RITHOLTZ: Right.
CHROPUVKA: It’s interesting enough, across 16 different exchanges or roughly about 16 different exchanges and so we spent a lot of our time looking at things like volumes and spread and an overall liquidity, and so that’s really where we see, you know those effects and I would say, it looks like over the last 12 months, it’s been a pretty rocky area, but we’re pretty much back to kind of pre-pandemic levels when I think about quote sizes, bid ask spread, for S&P type names.
So looks like things are getting a little bit back to normal in terms of market liquidity, depth and spreads.
RITHOLTZ: So you mentioned value earlier. I think this is up until this quarter, I think the underperformance of value versus growth is it could be the longest one we’ve seen of growth dominating value since at least since the CRISP database goes back to 1917, or something like that, how do you think about something that’s rather unusual in those terms and how does the fed factor into this or is that even an input to what you’re building and your models.
CHROPUVKA: Yes, it’s very consistent with again thinking about it as a very diversified portfolio and you know, value investing over the long-term is done reasonably well, I’m very impressed that you went back to the CRISP database, so kudos to you.
RITHOLTZ: (LAUGHTER)
CHROPUVKA: When I think about you know, value again, value on itself, when we tend to take approach where we want to be more diversified, we don’t want to just bet on value, we want to have things that have growth attributes and really have some, we call it idiosyncratic or some specific type of return where we think that are rich and in terms of other types of factors like value or growth or low volatility, those are something that we want to have a very modest amount of exposure or you know, we really don’t want to — we don’t necessarily make a lot of money on that particular aspect because it’s very common and it’s also subject to very sharp moves.
RITHOLTZ: Right.
CHROPUVKA: And so, you know, we aim to have a little bit more consistent persistent results but to your point, you’re right, this is but it’s been an unbelievable challenge for value, we have seen a little bit of a turnaround, you know, since the election and so you value started do a little bit better but your point is well taken. But I think it just speaks to our philosophy of you want to have many different ways of looking at the fortunes of the company and diversification — diversification, diversification is key. And at WorldQuant, we do that with millions of alphas, we have many different portfolio managers many different ways of combining our alphas.
And so we kind of live and breathe from diversifying of our people to our alphas to our portfolio managers and then to our execution. So again, I think your observation is spot on and I would say we as a group try not to think too bets in one place.
RITHOLTZ: Interesting. You know, you mentioned certain strategies of popular and I can’t help but think back to the quant quake that took place about 8 years ago where a lot of quantitative strategies were very similar different shops and we saw what had become a fairly crowded trade. Maybe it’s a decade ago, it’s even longer ago, what do you make of that?
CHROPUVKA: Crowded trade? Yes, so it was more than a decade ago, it was, you know, I think it was almost …
RITHOLTZ: ’08?
CHROPUVKA: Thirteen and a half years ago.
RITHOLTZ: Yes, okay.
CHROPUVKA: I think it was a huge lesson learned for quant investors. I think it was a period where there was some shops had a fair amount of complacency where they didn’t continue to use their research, there was more into there was some should of been a lot more pushing in terms of research and I think you look back and you saw events, that you know, for a number of reasons, one is there was a fair amount of leverage in the system and so you are able to amplify your returns with leverage.
And leverage is great if you are always going to have high positive returns, but when you don’t, you know, leverage is a very big challenge because people call up and ask you for money need to pay them so I think that really was one of the biggest issues of ’07.
But I would also say that was crowded trades as you correctly point out and so I think one of the goals that we have at WorldQuant is continue to differentiate, continue to create unique ways of making money for our clients, investing in our almost 300 researchers to try to continue to innovate and be much less crowded than other people.
Again, we want to be unique we don’t want to be susceptible to those large movements in terms of those “crowded trade” and that’s really a huge goal and frankly was a big lesson learned for I believe the quant industry that happens in almost 14 years ago.
RITHOLTZ: So let’s talk a little bit about the future of quant investing. You mentioned previously that the industry has learned from past mistakes, it’s involved, tell us a little bit about the direction the industry is an evolving towards.
CHROPUVKA: Sure, Barry. I think the — you know, the quant industry will continue to revolve in places like data in places like storage, in places like analytics and the tools that are that one can use to try to figure out the fortunes of a company have increased exponentially.
And so the amount of data that’s out there, the amount of data that can be stored, the amount of data that can be analyzed, the simulations that one can run has grown, I guess, absolutely exponentially and really for quant investor, it’s terrific because you know the world is industrial of coming in our direction, the amount of data we think one of our edge is to be able to take data, synthesize it and create information and drive returns and we think here at WorldQuant, we’re extremely well-positioned to be able to do that.
And so, I think it’s an absolutely output golden age for us as quant investors in terms of kind of where the industry is evolving really insistence and use evolution surprise you, what has taken place that you didn’t see coming or you saw coming in didn’t think would happen and it happened anyway?
CHROPUVKA: Let me tell you — you know, one of the surprises is the adoption of no more and more quantitative investing strategies in general, just given the everyday people’s thoughts on the use of computers in use of your phone to drive information, it’s happening across most every industry.
I guess I’m surprised –happily surprised that more and more kind of investment folks aren’t employing more and more quantitative strategy, good for us from where we sit.
RITHOLTZ: (LAUGHTER).
CHROPUVKA: But I’m just surprised you know I think everybody wants to, you know if you’re at a dinner party or you’re getting asked a question, it’s got to be empirically backed, you are going to look it up as quickly as you possibly can and you want to test at their or whatever someone said whatever hypothesis, you know and there’s been a lot of skeptics and they can be proven yay or nay very quickly.
And I’m just — you know, I guess I’m surprised that that’s not happening more and more in the investment industry, so that would be one of the — it’s one of my biggest surprises but I’m okay with that.
RITHOLTZ: You mentioned earlier trying to read sentiment data from analyst reports, I’ve read about firms trying to actually scrape market wide sentiment data off of social networks like Twitter, what does that look like and can you really finds and investable edge from the 280 characters of millions of people who know relatively little although they may not know that they know relatively little?
What signal is in all that noise?
CHROPUVKA: Sure, Barry. I think you are touching on a really important component, you think about all this alternative data, you know, what you do with it and how do you utilize it and I think a diversified approach of using things like satellite images, using things like social media, you know can be quite impactful some of which might be very, very short run.
Some of it might have more longer-term ramifications, things like credit card transactions, web clicks, I mean here’s so much alternative data out there that you know if you can think about how best to utilize it, again this that whole concept of marrying kind of technical acumen and so you understand beta, you understand something about putting data together to create some type of expected return but also marrying that with some business acumen.
And I think is really exploding, and so you know whether it social media, whether it’s satellite imaging, whether it is you know, clicking on getting vendors that provide some of this beta all anonymized to be able to have a view of where companies fortunes may be is certainly something that the industry is seeing.
There’s a massive amount of data vendors out there, there is some consolidation and some of the data vendors but there’s a lot of data out there to be of able to employee not to social media but other types of data that can be informative of a company’s fortunes.
RITHOLTZ: Yes, I’ve been kind of fascinated by the satellite data and how granular it can get not just tracking ships carrying goods or oil around the world but how deep the ships are sitting in the water that gives some insight as to how are they traveling full, half full, 3/4, that’s just astonishing stuff.
CHROPUVKA: Yes, it really is and I think you know, we all have our phones and I could kindly track my kids on Life360 and figuring out where they are. This is happening, it’s part of our everyday lives and it’s — it could be insightful information, you know, certainly help me with my kids and other parts whether it’s you know, tankers or whether it’s you know, clicks, these are insights that can be potentially telling.
Again I would go back to my other comment about diversification. So in isolation, these you know, won’t — you know, almost for certain will not work all the time, but if there’s some level of insight that you can gain from a piece of this data or a way to look at this data and then you marry that with millions and millions of other things, you can have a pretty good sense of that company’s fortune.
So you know, again if it’s really about diversification and not thinking about these pieces of data in isolation, you know, we talked a little bit about value than other types of factors, again, I think you know the approach that one – that most quants take is really to think about diversification as a really helpful way to produce consistent results for clients and I think that’s really, you know the key to how most quants and at WorldQuant, you know, we think about diversification at pretty much every step of the way whether it’s our people, whether it be expected returns that we try to generate more portfolio managers and how we go about executing and making that a reality.
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RITHOLTZ: So you talked several times about how gigantic these data sets are and how fast they are growing, how big can these get and at what point do they become unmanageable? I mean when is too much data too much?
CHROPUVKA: We certainly have not found that out yet, the nice thing about it is there is the amount of data is increasing exponentially, there are some unbelievable stats on just that massive amount of growth and I think frankly, we spent an enormous amount of time figuring out how to take in that data, how to collate it, how to check that that data.
You know, again, it’s the gory details of data but it’s fascinating, IDC reported a quote that more than 5 billion consumers interact with data every day, 5 billion consumers interact with data every day. By 2025, they say that number will be 6 billion or three quarters of the world’s population. So data getting created again exponentially, I think this thing that we spent a lot of time on is how do we ingest that? How do we come up with processes to be able to be ingest it, how do we store it? How do we analyze it?
Again and that’s really one of our integral parts of what we do and how we do it and you are seeing this in the investment industry, you are seeing this in many different industries but I think that’s one of the exciting parts and it’s a lot of data, but again, I think that’s really – you know, it’s always been waiting for these times for a long time continue to have more and more data that allows us a huge opportunity to drive an edge because we think we know what to do with that type of data, to pair that with some of our smart researchers and figuring out what are the insights.
So you know, I think the other challenge that we face in terms of your comment about too much is against signal-to-noise, what is a signal, I mean what gives you insight and what’s just noise and so part of our jobs as researchers and portfolio managers as good quants at WorldQuant is to kind of distinguish between the signal meaning does this have some value, does it provide me insight or is it really just noise and you know, not really worthy of allocating any investment to it?
RITHOLTZ: Quite interesting. Let me change gears on you a little bit, we recently heard rumblings about possible changes in tax policy coming out of the new administration, I know at Goldman, I know at GSAM, you did a lot of work on tax efficiency. From your new perch, how do you think about things like tax efficiency in investing?
Is that something that’s still within your bailiwick or is it more institutional and you’re less focused on tax?
CHROPUVKA: Yes, so the way we think about it and I am happy to spend some time on just generally tax efficient investing. I think it is a very useful piece and I’ve had some experience on it but more substantively on you know, kind of what we do now at WorldQuant, if there is a change in tax policy, we’re going to figure out how it could impact a particular company, are corporate taxes going to go up or down and how will that impact you know, cash flow or something on a company’s statement.
So that’s really how we would tackle it and you will understand how we should update our accounting for those types of events and adapt accordingly like what you would expect most investors to do.
And the rate of tax efficient investing, I’m happy to spend a few minutes there but we don’t — that’s really not one of our core focuses at WorldQuant.
RITHOLTZ: You’re looking more as to how the changes in taxes impact the bottom line for the companies or their position relative to their competitors and what the tax code means to their valuation. Is that is that a fair description? Like I know you guys aren’t tax loss harvesting the way a traditional advisor would, you’re running a very different portfolio for a different audience so your perspective is what does this mean to the companies that we may or may not own and how does it affect them relative to their competitors, is that a fair statement?
CHROPUVKA: Yes, I think that’s a fair statement, again, we want to see — as Biden you know, institutes new policies, how that will effect corporations and frankly that goes beyond tax policy other types of policies and so you know, there’s international policy that will affect trade or any type of know of things that come out of Washington or frankly any other government around the world even we are global organization, we are going to attempt to take that into account to try to understand it, understand what the ramifications are to companies and being able to position our portfolios accordingly.
And that’s we do that whether it’s a regulatory issue or an event that we talked about again, our ability to adapt and understand what’s going on in markets, what is going to affect companies or particular asset classes is really one of the fun parts of the job of being a quantitative investor.
RITHOLTZ: What are other fund parts of the job, what do you enjoy doing most as president of WorldQuant?
CHROPUVKA: So I will tell you, I’ve had such a great time of walking out of meetings with action steps, it’s been — seeing interesting people intellectually stimulated around and again where a lot of it is on Zoom and so we sit there and just watching how people dialogue has just been so incredibly exhilarating and a lot of the great ideas and you know, watching how respectful people refer to each other and challenging them in thoughtful ways and almost hearing them think, you know, right in real time has just been incredible in terms of the organization, it’s just highly productive, highly collaborative, there’s just a lot of great decision-making that goes on.
We just recently did a research off-site where we just walked through and have many decisions, we pride ourselves that you know, we are very action oriented and so you know that’s been some of the fun things that have been fortunate enough to observe in my six months.
RITHOLTZ: Let me jump to my favorite questions that I ask all my guests starting with what are you streaming these days give us your favorite Netflix or Amazon Prime show or any podcast you might listen to, what’s keeping you entertained?
CHROPUVKA: Sure let’s say – I have been a fan of “House of Cards” my daughter and I watch “A Million Little Things” Joe Rogan’s interviews with Elon Musk are pretty, pretty impressive and I would have to say in a one of my favorite videos is a 4 minute and 13 second Jason Garrett speeches he talks about One World Trade Center, it’s just — it’s an amazing video that and all my friends get a text from me on a pretty regular basis to just level sets, it’s a great video.
RITHOLTZ: Really interesting.
Tell us about your mentors, who helped to shape your career?
CHROPUVKA: Sure, I would say my dad had unbelievable work ethic, he’s a six day a week guy, one of my first bosses was a guy named Gus Economos (ph) who unfortunately passed away in 9/11 but you know, was able to balance enormous credibility or industry credibility with a sense of humor and you tell me, I may have taught you everything you know, but I didn’t teach you everything I know and I always think that’s a pretty funny quote.
And the last one, I would say on the quant spaces are two gentlemen in Bob Jones and Don Mulvihill. Bob was the founder of the GSAM quant equity business back in the day and you know, taught me a lot and it really helped shape my career and my interest in quantitative investing and then Don was an age-old colleague and boss of mine that really taught me a tremendous amount about investing and dealing with clients and two great early role models that I’ve had in the industry.
RITHOLTZ: Quite interesting. Tell us about some books, what are some of your favorites and what are you reading right now?
CHROPUVKA: Sure, so some of my favorites especially since I had a decent amount of time between taking on the role at WorldQuant and I was able to read David Rubinstein’s “How to Lead” which I thought was just terrific. Satya Natella “Hit Refresh” which I thought was quite good, I was also able to read books from our CEO who had two good ones, “Finding Alphas” and “The Unrules” so I got to plug those too, those are quite good and just interesting ways of thinking.
And then what I’m reading now which I think is a pretty cool book, it’s called “The Outrageous Good Fortune” it’s about a guy named Michael Burke, football hero, UPenn, CIA agent, overthrew communist government, ran intelligence for Eastern Europe, Ringling Brothers’ Circus he was the executive TBS sports president of the Yankees and president of MSG, so talk about a pretty packed life but that book is called “Outrageous Good Fortune” I’m in the middle of that and it’s pretty amazing.
RITHOLTZ: Really quite interesting.
What sort of advice would you give to a recent college grad who was interested in pursuing a career in quantitative finance?
CHROPUVKA: I would say to those that are — first of all, they are welcome, we would love to see them, I would say enjoy the journey, substantively network, you learn so much from asking a lot of questions about what people do and how they do it, be a sponge and surround yourself with some really smart people that are equally driven.
And then you know, the last thing I would say particular for quant investors is marry the how and the why and what I mean by that is a lot of people either have the correlation understanding or the causation understanding, correlation of they understand that the math behind it, causation they understand the practical effect so it could work again, marrying those to think really makes for a phenomenal quantitative investor.
RITHOLTZ: Quite interesting, and our final question, what you know about the world of quantitative investing and trading today that you wish you knew 20,25 years ago when you were first starting out?
CHROPUVKA: I would say besides buying Monster beverage what I think is up about 600,000 percent versus the S&P is only up a less than a thousand percent, I would say, I would there’s really nothing I would want to know in advance and I — and it might sound a little weird but I think it spoils the excitement, one of the great things about being in this quantitative business really finance in general is just the exploration, the quest for learning, that is something that has driven me in my career that I truly enjoyed.
And knowing you know stuff would kind of spoil that journey. And the hiccups that I’ve had across the — around the years and the successes I think have made the journey awesome and I would say respectfully no thanks on the on the other pieces because it wouldn’t have made the journey as fun.
RITHOLTZ: We have been speaking with Gary Chropuvka, he is the president of WorldQuant. If you enjoy this conversation, well please check out any of our previous almost 400 prior conversations, you can find those at iTunes, Spotify, wherever you feed your podcast fix.
We love your comments, feedback and suggestions, write to us at mibpodcast@bloomberg.net, sign up for my daily reads at ritholtz.com, check out my weekly column on bloomberg.com/opinion, follow me on twitter @ritholtz.
I would be remiss if I did not thank the crack team that helps put these conversations together each week. Nick Falco is my audio engineer, Michael Boyle is my producer, Atika Valbrun is our project manager, Michael Batnick is my head of research.
I’m Barry Ritholtz, you’ve been listening to Masters In Business on Bloomberg Radio.
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