Quantitative fund

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A quantitative fund is an investment fund that uses quantitative investment management instead of fundamental human analysis. [1]

Contents

Investment process

An investment process is classified as quantitative when investment management is fully based on the use of mathematical and statistical methods to make investment decisions. If investment decisions are based on fundamental analysis and human judgement, the process is classified as fundamental. [2] The quantitative investment process, essentially, breaks down into three key components:

Quantitative portfolio managers and quantitative analysts usually require a strong background in mathematics and computer science, besides knowledge of the academic financial literature. Many quantitative specialists have a PhD in Financial Economics, Engineering or Mathematics. In depth knowledge is needed to as the investment algorithms employ advanced optimization methods using the latest academic insights. Statistical models are used to explore profits that may be made out of systematic market abnormalities which can be very fast such and requires high-frequency trading, but can also be slower requiring less turnover when the alpha is based on factor investing.

History and performance

Hedge funds have been driving the growth of quantitative funds over the past decades. A good description of the history of hedge funds can be found in the book "More Money than God". Several of these early funds were quantitatively managed. Over the past two decades quantitatively managed funds have become popular as an increasing number of asset managers adopted quantitative investing and launched a wide range mutual funds as well as exchange traded funds. Most quantitative funds are equity funds, besides fixed income quantitative funds which have become more popular in the past years. [3] [4]

After the sub-prime mortgage market turbulence, which cast long shadows over many parts of the financial industry, the total mutual fund asset that employ quantitative model is estimated to be over US$400 billion at the end of June 2016. [5] As of 2019 the figure was to surpass the $1tn management mark in 2018. Quantitative investing accounts for 16 percent of actively managed assets in the U.S. in 2006, up from 13 percent in 2003, according to Vanguard. [6]

Many quantitative funds were able to deliver high long-term risk-adjusted returns profiting from the positive exposure of factors such as value, momentum, low-volatility and quality. This positive performance gave rise to the further growth of quantitative funds. Performance of several well-known quant factors was weak in the period 2018–2020, a period also referred to as the 'quant winter'. [7]

Fund structures

Quantitative strategies are offered in different type of fund structures:

Hedge funds have most investment freedom and can employ varieties of strategies such as market neutral, statistical arbitrage, or high-frequency trading strategies to enhance the return of one's portfolio, whereas ETFs are most constrained.

List of notable quantitative funds

The following firms are known for their quantitative funds.

The largest asset managers such as 'big three' BlackRock, State Street, and Vanguard also offer quantitative funds to investors.

See also

Related Research Articles

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Passive management is an investing strategy that tracks a market-weighted index or portfolio. Passive management is most common on the equity market, where index funds track a stock market index, but it is becoming more common in other investment types, including bonds, commodities and hedge funds.

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<span class="mw-page-title-main">TrimTabs Investment Research</span>

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A 130–30 fund or a ratio up to 150/50 is a type of collective investment vehicle, often a type of specialty mutual fund, but which allows the fund manager simultaneously to hold both long and short positions on different equities in the fund. Traditionally, mutual funds were long-only investments. 130–30 funds are a fast-growing segment of the financial industry; they should be available both as traditional mutual funds, and as exchange-traded funds (ETFs). While this type of investment has existed for a while in the hedge fund industry, its availability for retail investors is relatively new.

Jonathan Kinlay is a quantitative researcher and hedge fund manager. He is founder and CEO of Systematic Strategies, LLC, a systematic hedge fund that deploys high-frequency trading strategies using news-based algorithms.

<span class="mw-page-title-main">AQR Capital</span> Global investment management firm

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Clifford Scott Asness is an American hedge fund manager and the co-founder of AQR Capital Management. According to an April 2020 Forbes profile, Asness' estimated net worth was $2.6 billion.

Quantitative analysis is the use of mathematical and statistical methods in finance and investment management. Those working in the field are quantitative analysts (quants). Quants tend to specialize in specific areas which may include derivative structuring or pricing, risk management, investment management and other related finance occupations. The occupation is similar to those in industrial mathematics in other industries. The process usually consists of searching vast databases for patterns, such as correlations among liquid assets or price-movement patterns.

<span class="mw-page-title-main">Investment fund</span> Way of investing money alongside other investors

An investment fund is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the risks of the investment by a significant percentage. These advantages include an ability to:

<span class="mw-page-title-main">Millennium Management, LLC</span> American hedge fund

Millennium Management is an investment management firm with a multistrategy hedge fund offering. In 2023, it was one of the world's largest alternative asset management firms with over $61.1 billion assets under management as of January 2024. The firm operates in America, Europe and Asia. As of 2022, Millennium had posted the fourth highest net gains of any hedge fund since its inception in 1989.

ESG Quant is an investment strategy, developed by Arabesque Partners, which involves quantitative equity investing while utilizing ESG information, often referred to as "non-financial" information. ESG Quant strategies are implemented within systematic trading or quantitative trading approaches that leverage a large and growing collection of commercial ESG, alternative and non-profit or academic datasets. As such, there is no human judgment or discretionary buy-sell decision making; rather, “in a pure quant model the final decision to buy or sell is made by the model” or through the “utilization of an expert system that replicates previously captured actions of real traders.”

<span class="mw-page-title-main">WorldQuant</span> American international hedge fund and quantitative investment management firm

WorldQuant, LLC is an international hedge fund and quantitative investment management firm headquartered in Old Greenwich, Connecticut. Founded in 2007, the firm is currently managing approximately $9 billion in assets under management for Millennium Management via quantitative trading and other methods of quantitative investing. WorldQuant operated the WorldQuant Challenge, where participants compete in the field of quantitative finance, and WorldQuant Accelerator, an independent portfolio manager platform. In 2015 the WorldQuant Foundation launched WorldQuant University.

References

  1. ↑ Michael Alan Howarth Dempster; Georg Pflug; Gautam Mitra (22 December 2008), Quantitative Fund Management, CRC Press, ISBN   9781420081923
  2. ↑ Challenges in Quantitative Equity Management, Frank J. Fabozzi, Sergio M. Focardi and Caroline Jonas, 2008
  3. ↑ "Quants Are Taking over the World of Bonds in a Big Invesco Poll". Bloomberg.com. 27 September 2021. Retrieved 2022-01-10.
  4. ↑ Wigglesworth, Robin; Fletcher, Laurence (2021-12-07). "The next quant revolution: shaking up the corporate bond market". Financial Times. Retrieved 2022-01-10.
  5. ↑ According to Lipper, a newly established internal report [ full citation needed ]
  6. ↑ "Not the Man, But the Machine", Kevin Burke, 2006
  7. ↑ Wigglesworth, Robin; Fletcher, Laurence (2021-04-22). "'Quant winter' thaw ends long spell of drab returns for funds". Financial Times. Retrieved 2022-01-10.
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