I have seen a lot of research around the Black-Litterman approach and I think theoretically, it is a nice framework. However, it appears that its main strength is from a practitioner's point of view, that it starts with a "reasonable" starting portfolio and "tweaks" it to incorporate investment views. It appears to me that it is most beneficial to portfolio managers with less expertise in the technical and quantitative approaches.

My question is that is this approach used at all by the quantitative managers? Say for example for statistical arbitrage managers who usually have their own sophisticated portfolio construction frameworks?

If so, what is the market equilibrium / starting portfolio. How do you incorporate correlated views, and perhaps most interesting of all, how do you go about estimating the expected returns for the views.

Given that the role of the quantitative hedge funds in the market has been increasing, it's interesting that there is not much research done in this area (please correct me if I'm wrong). Is it because in practice Black-Litterman is not superior to typical approaches for quants?

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    $\begingroup$ There is no reason for a quant (or other kind of) hedge fund to stay close to the market portfolio, the way BL does. Generally they try to make as much money as they can from the predictive signals that they have, subject to an acceptable level of risk. If the client of the HF wants some market exposure they can buy an index fund in addition. So BL really is not applicable to these HFs. BL is for institutional investors who want market exposure slightly tweaked in accord with their views. $\endgroup$
    – nbbo2
    May 31, 2021 at 16:25
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    $\begingroup$ I totally understand this point of view, and I conjecture that this has been the original motivation behind BL. But nevertheless, the framework itself is very general. For example one does not need to start with the market portfolio as a starting point and can start with any prior assumption of returns (or equilibrium). $\endgroup$
    – Jim
    May 31, 2021 at 16:47


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