Quantitative fund

A quantitative fund is an investment fund in which investment decisions are determined by numerical methods rather than by human judgment.^[1]

Market outlook

In recent years, quantitatively managed funds have become a popular method used by newly launched mutual funds as asset managers adopted statistical models to explore profits that may be made out of market abnormalities. As of year-end 2004, 70 quantitative products that had an established track record by Casey, Quirk & Associates managed $157 billion, nearly double the assets from three years earlier when they stood at about $88 billion. By comparison, the assets in non-quant products increased to $925 billion from $720 billion, a 28 percent increase. Yet, quantitative investing accounts for 16 percent of actively managed assets in the U.S., up from 13 percent in 2003, according to Vanguard.^[2]

After the sub-prime mortgage market turbulence, which cast long shadows over many parts of the financial industry, the total mutual fund asset that employ quantitative model is estimated to be over 400 billion US dollars^[3] at the end of this June.

Quantitative investment process

A study of Fabozzi, Focardi and Jonas （2008）^[4] firstly identified an investment process as "fundamental" or "quantitative" by the way asset managers making investment decisions. If the whole procedure is done by human judgment or intuition, an investment process will be labeled as a "fundamental" one; and only if it is purely done by computer-based models, the process can be classified as "quantitative". There is also tradeoff between these two approaches, which they define it as a hybrid one if the money manager combines both ways.

Quantitative mutual fund versus hedged quant fund

Another concept that might make people confused is that quantitative funds can be operated as a hedge fund as well as a normal one. As a manager of a hedge fund whose job is to earn absolute return, one can employ varieties of strategies such as market neutral, statistical arbitrage, or high-frequency trading strategies to enhance the return of his portfolio, and also high leverages, since there are little constraints in operating hedge fund. But as a quant-mutual fund, an asset manager delivers alpha by stock screening and disciplined risk managements.

Operating a quantitative fund

For quantitative funds we are considering now, the investment process breaks down into three key parts:

• Input system. Providing all necessary inputs such as data and rules;
• Forecasting engine. Generating estimations for prices, returns and also, risk parameters;
• Portfolio construction engine. Resulting in portfolio construction advice using optimizers or heuristics-based system.

References