New Quants Are Focusing on Artificial Intelligence

There is a new breed of “quants” that are looking to disrupt the industry using artificial intelligence (AI), according to a recent article in Institutional Investor. One such fund is Numerai, started by 30 year-old South African Richard Craib, who thinks AI will “lower the cost of fund management, producing savings that can be passed on to institutional and retail investors.” While typical quantitative investment firms use people to build systematic strategies, Craib and his firm Numerai “intends to teach machines how to do that,” according to the article. Renee Yao, a Ph.D. in math and statistics, founded statistical arbitrage […]

There’s One Investing Edge Left – And Anyone Can Capitalize On It

By Jack M. Forehand —  “In investing, what is comfortable is rarely profitable.” – Rob Arnott Wall Street has become an incredibly difficult place for anyone to get an edge. With technology taking over the market, any small mispricing is typically corrected very quickly. And talent within the industry is also as good as it ever has been. Over 17,000 people were awarded CFA charters following the most recent exam. That is more than double what it was 10 years ago and triple what it was 20 years ago. The result is that outperforming the market has become incredibly difficult. […]

A Practical Approach to Quant Investing

By Jack M. Forehand — This is the first post in a new series we will feature on the Guru Investor that will take an in depth look at quantitative and rules-based investing, and models and strategies that work in the market over the long-term. At Validea, we have been running rules based strategies since 2003 and over the years, we have learned many things about what works, what doesn’t, and how to interpret it all from the perspective of a long-term investor. I will share those insights in this new blog column. Before we begin, it is important to […]

Finding Your Edge a Key to Investing Success

By John P. Reese The mathematician Ed Thorp figured out how to beat Las Vegas casinos at blackjack and baccarat and they didn’t like it. But the MIT and University of California Irvine professor didn’t get discouraged. He applied those same mathematical principles to the markets, and also won. Mr. Thorp knows that good ideas have limited runs. As more investors pile into a winning trade, the returns start to diminish and the idea can no longer outperform the market. During a recent Bloomberg interview with Barry Ritholtz, Mr. Thorp discusses this phenomenon in the context of Berkshire Hathaway, whose […]

Hedge Funds Weigh-In on Human Versus Machine Debate

“Humans won’t be obsolete in this lifetime,” according to a recent article in Bloomberg. The article discusses a variety of prevailing opinions about the degree to which automation and big data will displace money managers. Winton, a London-based $30.6 billion hedge fund, told its clients that “people must still make the big decisions,” adding that computers are not ready to make investment elections on their own. Computers may be sufficient to “handle early stages of checking data,” according to the firm, but humans are “better at cross-referencing the irregularities against other sources to draw conclusions.” That said, however, the article […]

Index Fund Pioneer Warming to Computer-Generated Trading

Princeton economics professor Burton Malkiel, who started the first passive index fund for Vanguard in 1976, has experienced a “remarkable change of heart,” according to a recent article in the New York Times. Referencing Malkiel’s revolutionary notion that dart-throwing monkeys could pick winning stocks as well as market “experts,” the article says the “index-fund evangelist” now believes, “Maybe the experts can beat the monkey after all. That is, if the experts are software engineers writing sophisticated algorithms for computer-generated trading.” Malkiel, chief investment adviser for automated investment management firm Wealthfront, recently adopted a new approach they call Advanced Indexing. The […]

Quant Strategies Dominating the Market

The growing popularity of quantitative over traditional investment strategies is causing the “largest gap on record between humans’ and computers’ gross exposure to U.S. equities,” according to a recent Bloomberg article (data provided by Credit Suisse Group AG). The article also provides data from JP Morgan Chase & Co. showing that passive and quant investors account for approximately 60% of all equity assets compared to 30% a decade ago, but says “whether this computer-driven force dictates market moves is another matter.” Maria Vassalou, head of Perella Weinberg Partners LP’s Global Macro Fund, says, “Quants focus on a lot of assets that […]

Jason Zweig on Potential Quantitative Model Crisis

A Ph.D. in Economics and former senior risk manager for Bridgewater Associates, Richard Bookstaber argues that while human judgment along with quantitative modeling can lead to better results than either alone, “when humans put blind faith in quantitative models, that’s dangerous.” This according to Jason Zweig in this month’s Wall Street Journal. The article discusses Bookstaber’s new book, The End of Theory, in which the author argues that computers and mathematical models perform well when drawing from historical data on the assumption that “variables will behave in the future the way they did in the past.” However, Zweig writes, “a […]

BlackRock to Expand Quant Investing

Actively managed funds at BlackRock, the world’s largest fund company, are facing the new reality of quantitative investing, according to this week’s New York Times. The exchange-traded-fund business the firm bought from Barclays in 2009 has seen huge growth, “leaving in the dust the stock pickers who had spurred an earlier expansion for the firm,” according to the article. BlackRock has therefore adopted a plan to consolidate several of its actively managed funds “that rely more on algorithms and models to pick stocks.” This will affect approximately $30 billion in assets under management and result in at least 36 employees […]

“Quantimental” Fund Management Raises Eyebrows

It seems that name-melding has extended beyond the ranks of celebrities (think Brangelina and TomKat) to the world of fund management. An article in this month’s Pensions & Investments explains how, in the face of disappointing performance, hedge fund managers are integrating quantitative strategies into their fundamental approaches in an effort to improve results. Lin William Cong, finance professor at the University of Chicago’s Booth School of Business (and self-proclaimed inventor of the term “quantimental”) says market data is showing an “increasing use of quantitative tools” (that incorporate complex risk factors such as value, momentum and volatility) into the management […]

The Winning Investment Strategy A Top Value Manager Doesn’t Want You To Use

For nearly two decades, top value investor and columnist John Dorfman has been tracking a purely quantitative “robot portfolio” that has beaten the S&P 500 by about 12 percentage points per year. His advice: Don’t use it. In an interview with Wealth Track’s Consuelo Mack, Dorfman talks about why his robot approach isn’t suitable for the vast majority of investors. The strategy takes all stocks with market capitalizations of at least $500 million, eliminates those whose debt is more than their equity, and then selects the ten with the lowest price/earnings ratios. While its track record is impressive, Dorfman says […]

Top Hedge Fund Uses Algos to Drive Performance

Pete Muller, who runs PDT Partners, is described by Forbes as “the latest, greatest member of a growing band of hedge fund [managers] that use complex math and computer-automated algorithmic models to buy and sell stocks, futures and currencies based on statistical correlations and aberrations that can be found in the market.” Muller, who worked with Mogan Stanely for years before taking a hiatus in 1999 and eventually starting his own venture, has a strong record of returns. His largest fund was up 21.5% net of fees over the first 11 months of 2015 – given particularly high fees, this […]

O’Shaughnessy: Timeframe Is Most Investors’ Biggest Mistake

James O’Shaughnessy’s What Works on Wall Street is something of a bible for quantitative investors, and in a recent Investors Podcast, O’Shaughnessy talked about what his vast amount of research has taught him. O’Shaughnessy says it is critical to understand human nature if you want to succeed at investing. While his book detailed how dozens of quantitative strategies have worked over several decades, he says he wasn’t worried that disclosing the information would lead to hordes of investors piling into the best strategies, and thus ruining them. He “knew that, human nature being what it is, that they might get […]

O'Shaughnessy on Investor Psychology, Bond Market Trouble, and Why Value Wins

In a wide-ranging interview with Barry Ritholtz on Bloomberg View, quantitative investing guru James O’Shaughnessy recently talked about why human beings are such inferior prognosticators compared to computer models, what that means for investors, why stocks may well be safer than bonds over the long run, and why holding period duration is so critical.