What is Quantitative Investing

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