What is quantitative investment?
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Introduction
This article briefly introduces the relevant knowledge of quantitative investment from four aspects: the definition of quantitative investment, the characteristics of quantitative investment, the advantages of quantitative investment, and the practical process of quantitative investment.
What is quantitative investment?
Quantitative investment refers to establishing a scientific investment system through quantitative models to obtain stable returns. With a history of over 30 years, its investment performance has been stable, and its market size and share have continued to expand, gaining increasing recognition from investors.
When it comes to quantitative investment, one cannot ignore the benchmark of quantitative investment - the legendary Wall Street figure James Simons.
By skillfully integrating mathematical theories into practical investment, Simmons has become one of the leading "model masters" in the investment industry. The Medallion fund operated by it had an average annual return of 35% from 1989 to 2009. If 44% of the commission is included, the actual annualized return of the fund can reach as high as 60%, which is more than 20 percentage points higher than the average annual return of the S&P 500 index during the same period. Even compared to the trading performance of financial tycoon Soros and stock god Buffett, it is still far ahead by more than ten percentage points. The most difficult and valuable thing is that even during the outbreak of the subprime mortgage crisis in 2008, the investment return rate of the fund could still remain at an astonishing level of around 80%. Simmons gradually rose to fame by combining mathematical models with investment strategies, ushering in the era of quantification under his leadership.
Value investing and trend investing (technical analysis) are investment methods that have led the past century. With the development of computer technology, existing investment methods have merged with computer technology, resulting in quantitative investment.
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The difference between quantitative investment and traditional investment
Simply put, the relationship between quantitative investment and traditional investment methods is similar to that between traditional Chinese medicine and Western medicine. The most distinct difference between quantitative investment and traditional investment is the application of models, which is similar to the application of instruments in medicine. Traditional Chinese Medicine mainly uses medical methods such as observation, smelling, questioning, and palpation, and largely relies on the long-term accumulated experience of traditional Chinese medicine for diagnosis, with a greater degree of qualitative analysis. Western medicine, on the other hand, is different. Western medicine mainly relies on modern instruments, such as taking X-rays, B-ultrasound, and laboratory tests, which rely on medical instruments for testing. Detailed data evaluation standards are established for each examination result, and the crux of the problem is finally determined, and then targeted medication is prescribed.
The specific comparison is shown in Table 1:
What are the advantages of quantitative investment?
The advantages of quantitative investment lie in discipline, systematicity, timeliness, accuracy, and diversification.
- Discipline: Strictly implement investment strategies, not change them arbitrarily due to changes in investor sentiment.This can overcome human weaknesses such as greed, fear, and luck mentality, as well as cognitive biases.
- Systematic: The systematic characteristics of quantitative investment include multi-level quantitative models, multi-dimensional observations, and observations of massive amounts of data. Multi level models include asset allocation models, industry selection models, and selected individual stock models. Multi angle observation mainly includes analyzing macro cycles, market structure, valuation, growth, profit quality, market sentiment, and other multiple perspectives. In addition, the processing capability of massive data can better capture more investment opportunities in the vast capital market and expand larger investment opportunities.
- Timeliness: Timely and rapid tracking of market changes, constantly discovering new statistical models that can provide excess returns, and seeking new trading opportunities.
- Accuracy: Accurately and objectively evaluate trading opportunities, overcome subjective emotional biases, and thus make profits.
- Diversification: Quantitative investment can serve as a tool for diversified investment while controlling risk. It manifests in two aspects: firstly, quantitative investment continuously excavates historical patterns that are expected to be repeated in the future and utilizes them, all of which are strategies with a high probability of winning; The second is to rely on selecting a portfolio of stocks to win, rather than winning with just one or a few stocks. From the perspective of investment portfolio philosophy, it is also about capturing stocks with a high probability of winning, rather than betting on individual stocks.
How to conduct quantitative investment?
Using quantitative strategies is an effective way to make quantitative investments.
By constructing strategies based on objective and accurate trading rules, and conducting backtesting on historical data, the backtesting results can be considered a quantitative strategy that can be used for real trading only after evaluation and review. Many private equity firms also have a simulated trading stage before the real trading.
Summary
Quantitative investment refers to establishing a scientific investment system through quantitative models to obtain stable returns. Unlike traditional investment methods, quantitative investment places more emphasis on the application of models, and its advantages lie in discipline, systematicity, timeliness, accuracy, and diversification. Using quantitative strategies is an effective way to make quantitative investments.