1.1) Investing vs
Trading
·
Trading = short-term strategy of buying and
selling stocks, bonds, commodities, FX, derivatives, etc
o
Often intra day
o
Includes high frequency trading/algorithmic
trading (these often have trading horizons of seconds or micro-seconds)
·
Trading strategies include:
o
Trend following
o
Pairs trading (E.g. BHP vs RIO)
o
Statistical arbitrage
o
Event arbitrage (E.g. around M&A, Earnings
surprise, etc)
o
Mean reversion
·
Investing = longer term objective
·
Investing may include:
o
Buying and holding an investment (E.g. stocks or
bonds) for a long period of time (mths but usually for yrs)
o
Includes both active managers (whom seek to beat
their chosen benchmark), as well passive managers (E.g. Vanguard)
1.2) Active vs
Passive Investing
·
Quantitative Investing falls into the Active or
Enhances Index Categories!!
·
Passive Managers
o
Believe that markets are efficient and so
construct portfolios that replicate their chosen benchmark
o
Have negligible risk vs benchmark and typically
charge very low fees (E.g. < 15bps – 15 bps = 0.15% of AUM)
·
Active Managers
o
Believe that they can outperform their chosen
benchmark (otherwise known as adding “alpha”)
o
Usually charge much higher fees and carry much
greater risk relative to their benchmark
·
Enhanced Index Managers
o
Get
enhanced index products – which sit between active and passive in terms of risk
and fees
1.3) Fundamental vs
Quantitative Investing
·
Strengths: Fundamental vs Quant Investing
·
How can Fundamental
Investors excel
o
Understand stocks in detail
o
Understand industry specific economics (E.g.
Porter Analysis)
o
Able to predict certain types of future economic
issues (E.g. Regulatory changes)
·
How can Quantitative
Investors excel
o
Systematic exploiting know alpha sources
(minimizes some analyst bias)
o
Universe breadth & hence scalability
o
Risk modeling and Portfolio construction’
1.4) Careers in
Qualitative Investing
·
Quants come from two key areas:
o
Finance, Economics, Actuarial or Accounting
backgrounds
o
Maths, Engineering, Stats or Computer Sciences
background
·
Backtest these alpha signals in industrial scale
databases, and implement these into production environment (for trading stocks)
·
Quantitative
investing =
o
Longer term active investing approach that
systematically exploits alpha signals (such as value, quality, momentum, and
sentiment
o
Build and backtest these alpha signals in large
databases, and implement these into a production environment (for trading
stocks) using risk models and quantitative portfolio construction techniques