Moneyball Is a Hard Game to Play for Funds and Baseball Teams

After many years out in the cold, it's been a great year for Bridgeway funds and the Oakland A's. The A's finished first in their division for the first time since 2006. So far, Bridgeway's flagship, Bridgeway Aggressive Investors 1 BRAGX has returns in the top quartile of its category for the first time since 2007.

What's the link? Both are run by quantitative analysis. It's funny that some reporters have said fundamental managers are really closest to Billy Beane'sMoneyball approach when it's actually quant funds who are like Beane. Beane goes strictly by the numbers--he won't even watch players or A's games for fear that it will cloud his judgment. Likewise, the quants at Bridgeway and other quantitative funds don't meet with management or even care much about what business a stock is in. As John Montgomery told Morningstar recently: "Looking at an individual stock is mildly entertaining but irrelevant."

Quantitative analysis helps both investors and general managers alike to take emotion out and just manage based purely on proven strategies. Quants often discover that the drivers of success are a little bit different from what conventional wisdom says.

Yet quants face their own challenges. They use readily available data that others can gain access to and then figure out the same strategy through their own testing. Computing power is cheap, and in the fund world you have a lot of people and their computers tracking trends and testing new models for finding mispriced stocks. Likewise in sports, quants have been ascendant as teams race to find better ways to predict which players can contribute the most to winning and which of those attributes are selling for the lowest price.

Thus, a quant model's success quickly erodes over time. In late 2003, Moneyball was published, giving the rest of baseball some insights into what was driving Billy Beane's process. Those attributes were quickly bid up, quants were hired by a bunch of teams, and Beane had to work harder to find new statistics that the competition hadn't uncovered. In fact, the team's performance slowly declined. It had two second-place finishes and then a first-place finish in the three years that followed but then two third-place finishes and one last-place finish. It wasn't until this year that it returned to first place.

  - source: Morningstar Analysts

To get a similar figure for Bridgeway Aggressive Investors 1, I looked at its quartile performances. You’ll see a similar pattern. It was strong in the early 2000s then severely slumped from 2008 through 2011. In fact, Bridgeway had another fund where the slump and asset drop were so severe that its performance fee actually forced it to pay money into the fund via a negative expense ratio. It has since merged that fund and another fund away as it retrenches. Montgomery is loath to provide much detail on the firm's quant models, so it's a little different from Beane's case, but there are also many more quants trying to find information edges in stocks than in baseball players.