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Chapter 9. Quantitative Equity Investing

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Efficiently Inefficient
This chapter is in the book Efficiently Inefficient
CHAPTER 9Quantitative Equity InvestingI think that good quant investment managers... can really be thought of as financial economists who have codified their beliefs into a repeatable process. They are distinguished by diversification, sticking to their process with disci-pline, and the ability to engineer portfolio characteristics.—Cliff Asness (2007)Quantitative equity investing—quant equity, for short—means model-driven equity investing, performed, for instance, by equity market neutral hedge funds. Quants codify their trading rules in computer systems and execute or-ders with algorithmic trading overseen by humans.There are several advantages and disadvantages of quantitative investing relative to discretionary trading. The disadvantages are that the trading rule cannot be as tailored to each specific situation and it cannot be based on “soft” information such as phone calls and human judgment. These disadvantages may be diminishing as computing power and sophistication increase. For in-stance, quant models may analyze transcripts of a firm’s conference calls with equity analysts using textual analysis, looking at whether certain words are being frequently used or doing more complex analysis.The advantages of quantitative investing include, first, that it can be applied to a broad set of stocks, yielding significant diversification. When a quant has constructed an advanced investment model, this model can be simultaneously applied to thousands of stocks around the world. Second, the quant’s modeling rigor may largely overcome the behavioral biases that often influence human judgment, perhaps those very biases that create the trading opportunities in the first place. Third, the quant’s trading principles can be backtested using historical data. Quants view data and scientific methods as central to investing:We are misguided when we exalt ourselves by insisting that the psychology of the marketplace and of man are unknowable. The sciences of man are

CHAPTER 9Quantitative Equity InvestingI think that good quant investment managers... can really be thought of as financial economists who have codified their beliefs into a repeatable process. They are distinguished by diversification, sticking to their process with disci-pline, and the ability to engineer portfolio characteristics.—Cliff Asness (2007)Quantitative equity investing—quant equity, for short—means model-driven equity investing, performed, for instance, by equity market neutral hedge funds. Quants codify their trading rules in computer systems and execute or-ders with algorithmic trading overseen by humans.There are several advantages and disadvantages of quantitative investing relative to discretionary trading. The disadvantages are that the trading rule cannot be as tailored to each specific situation and it cannot be based on “soft” information such as phone calls and human judgment. These disadvantages may be diminishing as computing power and sophistication increase. For in-stance, quant models may analyze transcripts of a firm’s conference calls with equity analysts using textual analysis, looking at whether certain words are being frequently used or doing more complex analysis.The advantages of quantitative investing include, first, that it can be applied to a broad set of stocks, yielding significant diversification. When a quant has constructed an advanced investment model, this model can be simultaneously applied to thousands of stocks around the world. Second, the quant’s modeling rigor may largely overcome the behavioral biases that often influence human judgment, perhaps those very biases that create the trading opportunities in the first place. Third, the quant’s trading principles can be backtested using historical data. Quants view data and scientific methods as central to investing:We are misguided when we exalt ourselves by insisting that the psychology of the marketplace and of man are unknowable. The sciences of man are

Chapters in this book

  1. Frontmatter i
  2. Contents v
  3. The Main Themes in Three Simple Tables vii
  4. Preface xi
  5. Acknowledgments xv
  6. About the Author xvii
  7. Introduction 1
  8. Part I. Active Investment
  9. Chapter 1. Understanding Hedge Funds and Other Smart Money 19
  10. Chapter 2. Evaluating Trading Strategies: Performance Measures 27
  11. Chapter 3. Finding and Backtesting Strategies: Profiting in Efficiently Inefficient Markets 39
  12. Chapter 4. Portfolio Construction and Risk Management 54
  13. Chapter 5. Trading and Financing a Strategy: Market and Funding Liquidity 63
  14. Part II. Equity Strategies
  15. Chapter 6. Introduction to Equity Valuation and Investing 87
  16. Chapter 7. Discretionary Equity Investing 95
  17. Chapter 8. Dedicated Short Bias 115
  18. Chapter 9. Quantitative Equity Investing 133
  19. Part III. Asset Allocation and Macro Strategies
  20. Chapter 10. Introduction to Asset Allocation: The Returns to the Major Asset Classes 167
  21. Chapter 11. Global Macro Investing 184
  22. Chapter 12 Managed Futures: Trend-Following Investing 208
  23. Part IV. Arbitrage Strategies
  24. Chapter 13. Introduction to Arbitrage Pricing and Trading 233
  25. Chapter 14. Fixed-Income Arbitrage 241
  26. Chapter 15. Convertible Bond Arbitrage 269
  27. Chapter 16. Event-Driven Investments 291
  28. References 323
  29. Index 331
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https://doi.org/10.1515/9781400865734-014

Chapters in this book

  1. Frontmatter i
  2. Contents v
  3. The Main Themes in Three Simple Tables vii
  4. Preface xi
  5. Acknowledgments xv
  6. About the Author xvii
  7. Introduction 1
  8. Part I. Active Investment
  9. Chapter 1. Understanding Hedge Funds and Other Smart Money 19
  10. Chapter 2. Evaluating Trading Strategies: Performance Measures 27
  11. Chapter 3. Finding and Backtesting Strategies: Profiting in Efficiently Inefficient Markets 39
  12. Chapter 4. Portfolio Construction and Risk Management 54
  13. Chapter 5. Trading and Financing a Strategy: Market and Funding Liquidity 63
  14. Part II. Equity Strategies
  15. Chapter 6. Introduction to Equity Valuation and Investing 87
  16. Chapter 7. Discretionary Equity Investing 95
  17. Chapter 8. Dedicated Short Bias 115
  18. Chapter 9. Quantitative Equity Investing 133
  19. Part III. Asset Allocation and Macro Strategies
  20. Chapter 10. Introduction to Asset Allocation: The Returns to the Major Asset Classes 167
  21. Chapter 11. Global Macro Investing 184
  22. Chapter 12 Managed Futures: Trend-Following Investing 208
  23. Part IV. Arbitrage Strategies
  24. Chapter 13. Introduction to Arbitrage Pricing and Trading 233
  25. Chapter 14. Fixed-Income Arbitrage 241
  26. Chapter 15. Convertible Bond Arbitrage 269
  27. Chapter 16. Event-Driven Investments 291
  28. References 323
  29. Index 331
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