Quantitative investing

Quantitative investing uses sophisticated computer-based mathematical models to identify and carry out trades.

Quantitative investing – also known as systematic investing – is the broad term for a wide range of different investment strategies that employ sophisticated computer-based mathematical models to identify and carry out trades.

Common quant strategies include factor investing, which looks at characteristics of an asset such as the profitability of a company. To take a simple example, an investing algorithm might buy stocks that appear cheap on measures such as price/book value and sell stocks that look dear. This is a classic value investing approach that a human manager might follow. But the algorithm will take into account far more metrics than a human manager might, while ignoring other considerations that might sway a human – such as whether they think the firm’s management is good. 

Risk parity strategies allocate between different assets depending on how volatile they are and how much volatility the investor wants. Trend-following strategies (also known as managed futures or commodity trading advisers (CTAs)) look for trends in the price of assets and make decisions based on those. Statistical arbitrage is based on relationships that normally exist between the price of different securities. Event-driven strategies identify patterns around events such as earnings announcements or corporate actions. Systematic global macro decides whether to invest in countries, assets or sectors based on quant models that use economic data.

Proponents argue that quantitative investing helps remove biases and emotion from investment decisions, ensuring that they are based purely on data. While quant models are initially programmed by people, the role of humans in making individual investment decisions is greatly reduced. With some of the newer artificial intelligence-powered approaches, even the designers may not fully understand why a system chooses specific trades.

Recommended

Laffer Curve
Glossary

Laffer Curve

The Laffer Curve states that the higher you set tax rates, the more you will receive in tax revenues until you hit a certain point. Thereafter, tax re…
29 Sep 2022
Free cash flow yield
Glossary

Free cash flow yield

The free cash flow (FCF) yield is a way to decide whether a firm is cheap or expensive based on its cash flows rather than, say, its earnings.
4 Aug 2022
Advertising in MoneyWeek
Glossary

Advertising in MoneyWeek

To book magazine, email or website advertising, please contact:
26 Jul 2022
Marking to market
Glossary

Marking to market

This is the process of updating a portfolio to reflect the latest available prices.
23 Jun 2022

Most Popular

Share tips of the week – 30 September
Share tips

Share tips of the week – 30 September

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
30 Sep 2022
Should you fix your mortgage? Here are the best rates available now
Mortgages

Should you fix your mortgage? Here are the best rates available now

Rising interest rates look set to spring a nasty surprise on millions of homeowners next year. You need to take steps today to protect yourself from a…
30 Sep 2022
Why everyone is over-reacting to the mini-Budget
Budget

Why everyone is over-reacting to the mini-Budget

Most analyses of the chancellor’s mini-Budget speech have failed to grasp its purpose and significance, says Max King
29 Sep 2022