An Introduction to Quantitative Investing: Dispelling Myths and Misconceptions (Part One of Three)

Quantitative investing involves the systemization of human knowledge or the objective – i.e., unbiased and unemotional – exploitation of data by a machine. Although the concerns faced by quantitative asset managers differ somewhat from those faced by fundamental asset managers, they are largely variations on a theme: traditional managers are increasingly utilizing empirical analyses to inform their trading. Quantitative managers, which currently represent over a quarter of hedge fund assets under management, are also being perceived as a “third pillar” in portfolio management, with barriers to adoption eroding as investor education and empirical evidence of their efficacy increase. This article, the first in a three-part series, provides an overview of quantitative investing and the ways it differs from fundamental investing; discusses the growth of quantitative investing; and evaluates the practical risks and misconceptions of quantitative investing. The second article will analyze regulatory actions and guidance applicable to quantitative managers, as well as the special regulatory risks that those managers may face. The third article will explore the heightened importance of cybersecurity and intellectual property protection for quantitative managers; negotiations with investors over capacity constraints; and methods for quantitative managers to attract and retain talent in the face of stiff competition. See “How Quant Funds Can Maximize Appeal to Investors While Minimizing Cyber and Regulatory Risk” (Apr. 12, 2018).

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