  Given a new candidate asset represented as a time series of returns, how
should a quantitative investment manager be thinking about assessing its
usefulness? This is a key qualitative question inherent to the investment
process which we aim to make precise. We argue that the usefulness of an asset
can only be determined relative to a reference universe of assets and/or
benchmarks the investment manager already has access to or would like to
diversify away from, for instance, standard risk factors, common trading styles
and other assets. We identify four features that the time series of returns of
an asset should exhibit for the asset to be useful to an investment manager,
two primary and two secondary. As primary criteria, we propose that the new
asset should provide sufficient incremental diversification to the reference
universe of assets/benchmarks, and its returns time series should be
sufficiently predictable. As secondary criteria, we propose that the new asset
should mitigate tail risk, and the new asset should be suitable for passive
investment (e.g. buy-and-hold or short-and-hold). We discuss how to quantify
incremental diversification, returns predictability, impact on tail risk, and
suitability for passive investment, and for each criterion, we provide a
scalable algorithmic test of usefulness.
