Patterson, at Prudential’s New Jersey headquarters, cautions his market theoreticians against overconfidence in their models. That’s what did in the hedge fund Long Term Capital Management.beauty of theoretical physics intersects with the messy business of stock picking at the Newark, New Jersey, office of PGIM Quantitative Solutions. There, George N. Patterson, a physics Ph.D.
“We’re like a baleen whale filtering tiny shrimp,” Patterson says. A whale in a big pod: PGIM Quant accounts for $102 billion of the $1.3 trillion in global investment management at Prudential Financial, the 149-year-old insurer. PGIM’s computer whizzes can earn their keep even if all they do is track the benchmarks. The reason is that endowment and pension clients have different and exacting constraints. One may want to keep up with the S&P 500 while holding no fossil-fuel stocks, another may purge weapons or tobacco, while yet another might want to underweight a sector that is overrepresented in its accounts elsewhere.
The late Harry Markowitz laid out the relation of risk to reward 72 years ago. He calculated the payoff from diversification in terms of the covariance between any two stocks, a measure of their tendency to march to the same beat. The game is to get securities with low covariances.
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