Fund teams put faith in quantitative investing By Deborah Brewster in New York Updated: 12:40 a.m. ET Aug 14, 2006 Barclays Global Investors, the fund management unit of Barclays, is one of several groups â including Goldman Sachs and Bridgewater Associates â benefiting from the rapid growth in quantitative investing. This style of money management has recently been growing at more than 20 per cent a year, twice the pace of the rest of the industry. The world's biggest money manager is BGI, which edged past Fidelity and Capital Group with an entirely quantitative investing method, which uses computer models rather than people to make trading decisions. Estimates vary as to how much quantitative money is managed actively â when computer models pick individual stocks instead of indices. BGI has $1,600bn of quantitatively managed funds, of which about $340bn is managed actively, about a fifth of its total. Goldman has more than doubled its quantitative money in the past three years to $100bn, all actively managed. Three of the 10 biggest hedge funds in the world are purely quantitative. The trend, which has given rise to nervous jokes about computers taking over, contrasts with the investing style prevalent in the 1990s, which was based on individuals making decisions. A computer model is able simultaneously to take into account thousands of correlations in assessing a company's share price, whereas a human is able to consider only a few. Bob Jones, who heads Goldman Sachs' quantitative division, says: "[Quantitative] strategies have simply delivered better and more consistent performance." Critics say quantitative investing is risk-averse and favours companies with characteristics that are easily measured by computer models, such as cash flow. "How can a computer model predict the next Steve Jobs?" asks one traditional growth manager. Critics also say quantitative investing has a bias to value investing, which happens to have done well in the past few years. http://msnbc.msn.com/id/14334472/
Hmmm, neat-o. Trillions of dollars trying to buy the same stuff at the same time. These funds claim to focus on "cash flow" and buying "value". If you believe that publically-held companies use "aggressive" accounting methods, how can you really find value in the market? If these funds engage in "pairs trading", I can see where eventually, all companies will trade with similar P/E's and dividend yields because these funds will "arb out" the differences. I can also see where these funds resemble the indexation fad of the late 1990's where tons of money went into index funds producing above average returns only to be followed by below average returns. We'll see what happens.
The only way I see this as being ultra-effective is if these HFs somehow got inside information and used it to foresee moves in a company's stock. Like if you were buying and selling shares based on POSs or something along those lines. Maybe if you had some way to hack B2B sales.
The vast majority of quant strategies are long corr/mean-reverting. So we have less vol to look forward to.
only an idiot would think computers are not more efficient at trading than humans. provided the algorithm is right ofcourse.
And all a computer is is an idiot that follows directions well. I think the problem is that its hard to define an efficient algorithm and for it to be adaptable too. A good human trader makes many decisions in a trading day that would be hard to quantify on paper and turn into rules that can be applied as an algorithm. What the human lacks in speed and raw computing power he makes up in adaptability and learning. As far as I know there is no program in existence yet that can derive market relationships and come up with reasons for the relationships without human intervention. Programs can look for all kinds of correlations, but they can't distinguish between just a correlation and a correlation based on causation. Ultimately this is why we still need human traders. -Neo
Deep Blue beat Kasparov. If you think developing a trading system is harder than developing a chess computer capable of beating Kasparov, guess again Your average home based PC chess computer will beat the pants off of 99.9% of chess players in the world. Good luck competing with good trading computers, like mine I use to trade discretionary. My computer destroys me in trading now. Not even close. Lightspeed reflexes and emotional control greator than Mr Spock, LOL. Beat that!