If timely and accurate information is a vital factor in analyzing stocks and key to smart investments, today’s investors face nothing short of a tidal wave of data. In the face of thousands of data points about every public company, from their financial ratios to news breaking headlines to social media postings, it is often difficult to make sense of all the noise. This complexity makes one thing abundantly clear: no human can analyze it all on his or her own. A powerful computer system, on the other hand, may have everything we need to try to identify and understand where the best investments might hide.
Thus, we have the heart of quantitative investing, one of the growing investment strategies around the world today. More and more investors have been gravitating toward algorithm-driven quantitative strategies at the expense of traditionally managed funds. In this discipline, experienced individuals with data and computer science backgrounds called “quants” rely on high-powered computers, vast data sets, and sophisticated algorithms to extract correlations and insights in order to systematically exploit patterns in securities prices and markets trends. What is this strategy all about, and what can it mean for your investments?
Understanding What Quants Do: What’s the Quantitative Model All About?
Almost everything about a stock’s performance and the overall marketplace is quantifiable — we can express it in some form with numbers. Analyzing these numbers, determining their relationships to one another, deciphering patterns, and using them to make predictions are the core activities involved in quantitative investing. By interpreting past events and current trends, quants hope to draw conclusions that lead them to generate higher returns with lower risk.
There are several disciplines within quantitative analysis such as factor investing and statistical arbitrage. Data sources also range widely from publicly accessible stock prices to unique alternative data sets. Examples of alternative data include satellite pictures of retailers’ parking lots and sentiment of companies’ financial statements.
Why Quantitative Investing Remains the Wave of the Future
The earliest quants decades ago did not have access to the same level of computing power, advanced techniques, and big data available today. That made large-scale analysis more difficult and necessitated more narrow focuses. Today, many of those limits are gone. Quants have access to extremely powerful computers, and with the advent of cloud computing, the sky is the limit when it comes to analyzing the data produced by the market.
There’s no shortage of information, either. Where once it was a problematic barrier to effective analysis, today the amount of data is a blessing. A well-crafted algorithm can comb through millions of data points in a fraction of the time it would take for a human to reach the same conclusion. With so much activity, market inefficiencies become harder and harder to spot. With advances in technology such as machine learning, more patterns will likely emerge over time. These advances can make quantitative investing appealing to everyone from the high-flying trader to the retiree with a moderate appetite for risk, and it may explain why quantitative investing accounts for $1 trillion in market value.
Are There Any Issues with Quantitative Investing Models?
It’s important to note that quants aren’t all-knowing and all-seeing. The models are only as good as those who design them and the data input. It’s certainly possible for biases and incorrect assumptions to make their way into a model. A quant model tries to tell the future, but it can’t produce the exact details. Historically, quantitative market analysis has tended to focus on past results, adding new data as it becomes available.
A balanced investment approach may rely on quantitative principles while also following the best practices for managing risk. The right solutions are transparent about their results and upfront with what you can expect for your funds.
The views expressed represent the opinion of Passage Global Capital Management, LLC. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute as investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Passage Global Capital Management, LLC believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Passage Global Capital Management, LLC’s views as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumption that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements.