A Brief Guide to Quantitative Equity Management

Quantitative equity management is similar to advanced technology principals because it uses computer systems to make investments.

Quantitative equity management sometimes called systemic investing, is an investment approach that utilizes innovative mathematical modeling, data analysis, and computer systems to get a profitable trade.

Examples of Quantitative equity management include algorithmic trading, high-frequency trading, and statistical arbitrage. Up next we’re going to give you details on quantitative equity management.  

A Brief Guide to Quantitative Equity Management
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What is Quantitative Equity Management?

Sometimes called systemic investment,  quantitative equity management is an investment method that uses innovative mathematical modeling, data analysis, and computer systems.

It uses this to calculate the highest probability of implementing a profitable trade. Much as people tend to call it advanced technology, it dates way back (over 80 years ago).

 Quantitative investment strategies are usually run by highly educated teams and apply exclusive models to escalate their ability to beat the market. 

Also, for those looking for simplicity, there are off-the-shelf programs that are plug-and-play. Quant models work best when backtested, though their success rate and actual applications are debatable

Bull Markets

A bull market is a financial market condition in which prices are expected to rise or are rising. ‘Bull market’ term is often used about the stock market though it can be used in any traded thing/ commodity such as real estate, bonds, currencies, and commodities. Since prices of securities are prone to falling and rising continuously during trading, the ‘bull market’ term is reserved for that prolonged period when a big portion of security prices are rising. 

This market period can last for months or even years. Quantitative strategies are often used during this time of the bull markets when markets go haywire. Note that quant strategies are prone to the same risks as any other strategy. Therefore, the person behind the curtain driving the process should be knowledgeable about risk management

Running the Process

Quant is a term to refer to the brains behind the Quant models that we apply directly to portfolio management, trading, and other investment strategies. 

These quants compose complex mathematical models that are used to detect investment opportunities. Different quants develop different quantitative models hence there are as many models as the quants out there. 

There is no specific qualification or requirement in becoming a quant, most financial institutions will combine investment analyst skills, statistical skills, and programming or coding skills

Remember a quant model is as good as the people behind it; therefore, you need professional input to come up with models that produce results. It takes studying the market, predicting the future, and identifying risk.

Traditionally, the Quants team operated in the back office but today, they are in the front office.

A Brief Guide to Quantitative Equity Management
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Advantages of Quant Strategies

One of the benefits of a quantitative investment strategy is the model and ultimately the computer implements the actual buying and/or selling decision rather than humans. 

This avoids the emotional response people attach to buying and/or selling investments.

Most quant strategies work because they are based on discipline. Provided the model is right, the discipline will keep the strategy working at supersonic speed to exploit inadequacies in the market centered on quantitative data.  

Some models can use various inputs that will be working together at the same time while other models can use a few ratios like debt-to-equity, earnings growth, and price-to-earnings.

 Therefore quant models have various ratios and inputs on which they base their investment strategies, unlike the limited human brain. 

Quant models are capable of analyzing a big group of investments while the traditional analyst will consider just a few at a time.

Disadvantages of Quant Strategies

Much as the quant team keeps adding new features to the models to foretell future events, it is impossible to predict the future accurately all the time. This will lead to losses and poor investment strategies. 

Moreover for quant’s reputation, once they fail, they fail real big.

Bottom Line

Quantitative equity management uses complex mathematical models to identify investment opportunities. Utilizing such things in your portfolio can greatly advance your earnings.