In his article on Quantitative Investment, Gareth Henry seeks to elucidate the complexity behind the method that is widely used in Finance circles to predict and understand people’s mannerisms. He also explains how this method has gained traction over the years in the SEC market and with investors.
From numerous myriad of methods used in the early 90s Stock Exchange, there arose Program Trading. Unlike its alternative, this method quickly gained the market’s attention; resulting from the high profits it accrued.
With time, Program Trading gave rise to Quantitative Analysis; a technique much like its predecessor, albeit using statistical modeling and mathematics to gain understanding on the human behavior and apply the knowledge gained to Stock Market investment. Today, more than 80% of trade made in the American Stock Exchange is carried out with this method.
As Gareth Henry observes, the popularity of Quant Analysis has resulted in its marriage to other relating factors for analysis, generally known as Qualitative analysis. This varies, however, as some investment funds prefer plain old rational number-driven decisions as opposed to factoring in emotions which can sometimes be detrimental.
According to Mr. Gareth Henry, different strategies are employed depending on the market’s state. Typical key examples of Quant Trading applications can be found in:
- Risk Parity
- Statistical Arbitrage
- Factor Investing
- System Global Macro
Gareth Henry, however, also points out that in any typical Economic setup, things become relatively cheap whenever supply is more than the demand. With the influx of Quant Investment in the market over the last decade, competition has become stiff. Majority of investment funds are on par now regarding skill, and this has made attaining profit margins and beating competitors extremely difficult.
The methods and high-profit risks earlier Quant Investors had been relying on to defeat the system have generally become the unofficial standard.
This, coupled with the sudden behaviors of in interest rates observed over the past 30 years have resulted in a Quant Trading “rough patch.” Quants have addressed this by slowly upgrading their methods. Conclusively, Gareth notes that a different approach will be needed to tackle the colossal changes in today’s market.