Is There Any Future of Quantitative Investment and Quant Funds - Book Report/Review Example

Summarization of Ideas, Observations and Theories Put Forward By the Speaker Quantitative investment bases it philosophy on two types of investment strategies, which are passive investment management and active investment management. Under the passive investment management, the efficient market hypothesis is one of the major market scenarios that offers the right conditions for the quantitative investment to thrive. When quantitative investments exist under the efficient market hypothesis, certain conditions are assumed to be the key characteristics of this market (Shawn 2). These assumptions include existence of market inefficiencies, making of irrational decisions by the investors in case of market uncertainties and non-existence long-term stable arbitrage opportunities. Quantitative investments are also considered when based on a passive investment management. Under the passive investment management, behavioural finance assumptions are considered to be the main characteristic of the market. Under behavioural finance, the assumptions made incudes existence of market inefficiencies, making of rational decisions by the investors and existence of long-term stable investing opportunities. Active investment theory is further explained by use of mathematical equations, which shows the relationship between alpha and the investment skills. Equation (1) α=IC.σ. The above equation is used to show how alpha can be maximised in a market by improvement of the investment skills (High IC), creation of a better opportunity (high investment breadth) and finding of better business environment (high volatility). An investment can be measured in terms of the breadth and depth. When using breadth as the means to measure an investment one will consider the number of shares acquired by a particular investment strategy and the specific turnover of the portfolio (Shawn 6). Depth measures of an investment require a measure of the hit ratio, which can be denoted by the following equation: Equation (2) IC≈2.P (win)-1 In addition, another equation based on projected historical data can be used to measure the investment depth. Equation (3) IC= α/ (σ) Fundamental investments are considered to have a high investment depth and low investment breadth. Quantitative investment is the opposite of the fundamental investments. They have a low investment depth(IC) and a high investment breadth. Comparing Fundamental and Quantitative Investments QUANTITIVE INVESTMENT FUNDAMENTA INVESTEMENT Consistency and stern flow Based on level creativity and imagination employed Easy to test Hard to copy Massive investment targets Massive manpower Objective Subjective Focus on common phenomena Can explain special cases Rely on historical data Can tell if experiences matter Continued adjustment of investment fore cast Seldom adjust the fore cast May make some pseudo assumption Influenced by deviant behaviour Quantitative investment requires more skills than luck. Global Quant Fund Overseas of the Quantitative Structure A quant fund structure is made up of many partners who ranges from administrators, auditors, registrar and transfer agents, legal advisor, custodian, investment advisors, investment manager, prime brokers, executing brokers, partners, sponsors and a board of directors. Quant fund structure relies heavily on data and technology. Quant fund investment procedure involves four steps which are data collection and cleaning, strategy model construction and back testing, grouping of strategies and portfolio optimization and finally paper trading and lives trading with risk control. Discussion of the Summarized Ideas and Additional Thoughts The following areas, which were addressed by the speaker, are the major ones, which need to be discussed in detail. The section also includes additional information from my research, my views about specific issues related to quantitative investment, and global quant funds. Existing Investment Management Types Quantitative investment is best suited for active market because of the nature of the market. When investing, there is a need to involve the human component either a single entity or a team of managers who have the responsibility of actively managing the fund’s portfolio. Use of active investment management while considering quantitative investment will require the managers to be active .At the same time the managers will rely on the computer models and forecasts to make the right decisions. In addition, use of human judgement and experience is used to supplement decision-making process. So far from my own accord, I am in agreement with the speaker that quantitative investment are best suited by the use of the active investment management. Maximisation of the Alpha From the speaker’s point of view apart from creating better opportunities and improvement of investment skills other ways can be used to maximise alpha, which are as follows. An in-depth maximisation by use of all correlation matrices for existing strategies, which are required to set up the global investment guidelines for each fund of a particular hedge fund, can be a good strategy to maximise alpha. Therefore, broad guidelines will be e.g. 20% to 30% on primary hedge fund strategies and 0% to 20% on secondary hedge fund strategies (Scherer and Xiaodong 33). A thorough macroeconomic analysis and strategy-specific forecasts aimed at creating optimal portfolio that reacts to return and risk objectives is effective. It is a progressive procedure which involves permanent analysis of the macroeconomic considerations and the investment schemes which are based on allocations made .The process is dependable on strategic asset allocation which is evaluated annually. Another effect strategy to maximise alpha is use of an active tactical allocation that is in alignments with the market trends and macroeconomic evolution. Quant fund managers have noted that tactical allocation and the degree of diversification influence the degree of risk with every optional scheme having its own volatility, cross-correlation to other schemes and dispersion pattern (Arlen and Zangari 88). Alternative strategies are unrelated thus making it possible to lower the risk of a portfolio from the increase of different strategies. Therefore, assignment of such strategies will polish a fund’s risk profile, protecting the capital invested. Continued research and risk control has shown it possible to add security to the obscure hedge fund universe and providing absolute returns while controlling volatility by use of hedge funds/funds of fund. At the end of every year, the investment team has the duty of assessing the benefit, which is derived from asset allocation in comparison to industry indices Accessing the global hedges funds directly instead of single hedge funds, which have important roadblock to entry, gives a broad scope in accessing the hedge funds. The main function of hedge funds is to promote the beneficiary of investors from the talents of fund hedge managers. Locating of talented managers requires demands lot of skill and convincing such individuals to accept one’s investment, which is even more challenging because of the capacity restraints. Most of the effective hedge funds will turn out to be locked for a long period and have high minimal investments while at the same time requiring a certain degree of asset stability. This is because of the need to invest in less liquid markets or in schemes that require less time to blossom (Scherer and Xiaodong 38). In addition, most hedge fund investors tend to operate closely to the hedge fund industry and analyse the hedge funds markets diligently. Also, most investors are located out of most hedge funds. This makes hedge investors to be best suited in comprehending how various managers and strategies operate. This advantage puts investors in a position to acquire services of successful managers and strategies. Quantitative Management or Fundamental Investment Since the establishment of the quantitative investments, there has been a wide debate whether the use of computer models to determine what to and where to invest can be effective. Over the past, quantitative investments have shown both their strengths and weakness. Critics have capitalized on the weakness of the quantitative investments to show there ineffectiveness but research which has been gathered over the past tells otherwise. Quantitative investments and quant managers operations can best be understood by comparing the traditional investing methods and the modern quantitative investment method. The main problem existing in the world of investment is that traditional investing management strategies are colliding with quantitative management strategies .This leads to formation of two camps which believe there way of managing portfolio is the best. However, both sides have shown it is possible to have maximum performance from the investment. Due to the nature of uncertainty in buying and selling stocks, many investors are only satisfied with an approach, which will ensure consistent positive performance from their investments (Peake 67). The following points explains how the two types of investments approach certain scenarios and which one has the upper hand. Quantitative Strategies and Correct Predictions The key aim of managing active portfolio is to generate maximum alpha using the available resources with minimum costs possible .When the capital markets is effective and there are some extra cost involved with the active investment generation and maximisation of alpha consistently is not accomplished with ease (Peake 39). This calls for managers to be at their level best and interprete the existing market statistics correctly if they want to outperform. In most cases, managers who use traditional strategies of investing which are mostly based on subjective forecast and qualitative judgements find it difficult to produce data which has a high degree of accuracy thus enabling them to perform, in such cases it is difficult to determine whether there good performance on the investment is based on luck or skill. It is in such cases that quantitative strategies becomes handy in that due to their mechanical characteristic they can be started through trial and error in many markets to determine the correct behaviour of a particular market environment. After running trial and error market environments with positive impacts on the investment are focused on while those with no returns are neglected. In addition, various research and studies have shown a significant edge can be attained with the application of the right quantitative strategy Irrational Decisions Traditional strategies are prone to the behavioural and emotional prejudice due to their subjective nature. This disadvantages the managers and investors from obtaining and maintaining a high performance. When uncertainty looms the market many investors are ruled by greed and fear. Such emotions deter them from making the right decision Elimination of the behavioural prejudice from the investment procedure, making a right quantitative strategy enables investors to make choices, which are emotionally hard but have the highest chance of obtaining higher results over the long term (Peake 49). Therefore, during the time of temporal price fluctuations and uncertainty in the market the quantitative strategies are used to exploit behavioural inefficiencies. Identifying a Large Pool of Opportunities In quantitative strategies, investment decisions those determined by the objective computer models hence enabling supervision of a large number of securities on real time basis to effectively locate and capitalize on the best opportunity available. Thus, quantitative strategies are able to monitor and evaluate a larger number of securities within a short period compared to traditional investment strategies, which require a lot of time and resources to subjectively evaluate each security one at a time. This makes it impossible for traditional investment strategies to monitor large number of securities thus missing the existing opportunities existing in the vast pool of securities. Such situation makes quantitative investments strategies to have a wide market breadth (Scherer and Xiaodong 40). Risk identification While managing investments it is important to understand how risk occur and the best way possible way to manage and compensate the risk. In traditional investments usually expose their portfolio to a taxonomic market system risks which in either way goes uncompensated because they are usually gotten rid of by diversification. A thorough research that involves the trial and error methods to understand the characteristics of such risks is the basis of quantitative strategies. By use of statistics, one can understand which risks are well rewarding. When exposed it is possible to maintain effective risk management. It is here that quantitative investing has an advantage over the traditional investing methods because it exposes the portfolio strictly to risks, which are rewarding. The faster a risk can be identified and its nature understood, the better the position of the portfolio managers to make decisions Quant Managers and Randomness One of the major problems while evaluating active manager is the issue of differencing skills and luck. How can one determine whether a particular manager is simply lucky or it is the skills that are in operation? In traditional investments, it is difficult to conclusively answer such a question but when it comes to quant managers, such issues are handled differently. The quant managers test strategies over a long period of time and research risks thoroughly thus creating a large pool of data which helps to make crucial choices (Arlen and Zangari 85). This ability enables quant managers to use skill rather than rely on luck, which helps them reduce the chance of being fooled by randomness. Global Performance of Quant Funds Quantitative Investing’s Appeal For a nonprofessional who has heard about quantitative investment, one of the first questions to pop out is why the world is going for quantitative investing and use of quant funds. Such a question can be asked because traditional methods of investing seem okay and accepted as the standard method of reaping benefits from investments. Three goals have been identified as the reason why quantitative investing and quant funds are popular. These reasons are constricted risk control, increased static returns and higher overall performance. Diversification of the products and scalability are also key supportive issue that make investors consider the application of the quantitative process and use of quant funds. Reviewing Performance of the Quant Funds over Recent Years Although the positive side of quantitative investing and use of quant funds has highly been highlighted, there is a time during the beginning of the mid-2007 when quant funds tripped (Mcleavey and Defusco 45). This period of failure was widely blamed on the the relationship between managers and deepened leverage.it is believed quant managers were clasping same stocks because of the similarity of metrics value and momentum. This situation led to failure of the quant managers .When the stocks began to sell off the advantage that was applied by some participants in the quant fund deepened the problem. Some of the quant managers believed the failure of the quant funds was as a result of use of similar factors by many players in the industry thus when one needed to look elsewhere to trade there was no one to trade with. The financial crisis of the year 2008 and 2009 continued to be unrevealed leading to financial stumble and existence of cyclical stocks because of the preconception of the quant fund managers (Mcleavey and Defusco 56). This was a period of total failure but as the market started recovering in year 2009 the quant fund managers were too slow to recover. The bettered functioning of the quants over the last five years can be credited to the funds impulse triggered models. The bettered functioning of the quants funds over the last five years can be accredited to the funds impulse based models which change according to the market is ascending pattern as well as lessened competition based on both the buying and the selling side. Quantitavely managed assets have halved over the recent years. Future Trends of the Quant Funds. Quant funds and quantitative investing like any other endeavour have their own challenges, which involve correlating markets, fundamental makeshifts, style rotation and the problems of the insufficient liquidity. The problem of many quant funds managers using the same data and models is also suspected to be a major challenge in the coming years. Most of the data has been collected over the years may be of the same nature thus when a new issue in the industry arise and require the attention of new and unique data it becomes an obstacle to the quant managers who have been used to a certain type of data (Arlen and Zangari 84). Despite these challenges, the most efficient strategies to counter the challenges and improve the function of the quant funds are use of innovation, constant use of new and unique models. Conclusion The big question up to know is if there is any future of quantitative investment and quant funds. The future of the quants funds and quantitative analysis of the investments lies upon the ability of the key players in the industry to embrace the culture of introducing new models and data. This is because the major problem in the market is the use of similar models by the participants thus disadvantaging them when new low paying risks emerge. Also some unpredicted problem e.g. withdrawal of the Russian from the global stock exchange markets can only be foreseen by consistent embrace of new models. New markets especially in the Asian continent are preparing to fully-embrace the use of quantitative investments and use of quant funds as the new trend of running investments. This clearly shows investors have “tasted” enough of the traditional methods of investing and there is a demand to use new techniques that are more effective, which ensures managers produce maximum performance while managing portfolio. Such emerging issues are hinting that investors are shifting and willing to try quantitative investments and use of quant funds as one of the possible strategies to reap consistent benefits from investments. We should expect to see brilliant quant managers who are willing to adopt the strengths of both quantitative investment straggles and traditional investment strategies. Of important to note is that even if models are used to determine where to invest also such models are operated by human beings thus embracing a strategy which takes into account the positive sides of the both investment strategies is the key to ensuring consistent positive performance from the investments. Works Cited Arlen, khodadadi, and Zangari Peter. Optimisation and Quantitative Investment Management.   Journal of Asset Management 7. 2 (2006): 83-92. Mcleavey, Dennis, and Defusco Richard. Quantitative Investment Analysis. New York: John Wiley & Sons, 2011. Print. Peake, Charles. What Happened to the Quants in August 2007? Journal of Investment Management 5. 4 (2007) 29-78. Scherer, Bend, and Xiaodong Xu. Pooling Trades in a Quantitative Investment Process. The Journal of Portfolio Management 32. 4 (2006) 33-43. Shawn, Xiaojun. Introduction to Quantitative Investment and Quant Fund Business Globally. 24 January 2015, City University of Hong Kong. Hong Kong: City U News Centre, January 2015. Print. Read More