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Quantitative Hedge Funds: An Objective Approach to Investing

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Converting strategies in quantitative models

As the name implies, quantitative hedge funds (or quant hedge funds) are hedge funds that use quantitative or statistical models to make investment decisions. Quantitative models make decisions after analyzing volumes of data by relating the data to various indicators such as price to earnings, industrial production, gross domestic products growth, and other economic factors.

Complex mathematical and statistical models identify investment opportunities available in the market quickly by leveraging the power of computers to make most of the trading process automated. The primary aim of this process is to generate higher returns than the market S&P 500 Index (SPY).

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Quant hedge funds are a different type of hedge fund

The quant hedge fund is similar in many aspects to the way people typically think of the traditional hedge fund. Except, where the all-star-stock-picking fund manager sits at the helm, less-than-charismatic PhDs sit all day creating mathematical models that point portfolios towards risk parity or capture small inefficiencies in the market.

Quant hedge funds make use of algorithmic versions of various hedge fund strategies such as market neutral, convertible arbitrage, global macro, and event-driven. This process reduces manual handling and to some extent it makes quantitative hedge funds an objective trading process that is based more on facts than human opinion.

To understand more about quant funds and to see where they stand in the current market, we will study some of the top quant hedge funds that have been running strong over the years, including:

  • AQR Capital
  • Two Sigma
  • Renaissance Technologies
  • PanAgora
  • Acadian Asset Management

Apple (AAPL), Microsoft (MSFT), and Johnson and Johnson (JNJ) are some of the common stocks that appear in the portfolio of all these firms. The information technology sector forms a major part of these funds’ portfolio, so AAPL and MSFT are obvious choices. Also, e-commerce giant Amazon (AMZN) and pharmaceutical company Gilead Sciences (GILD) are famous among them. All of these stocks form a major part of PowerShares QQQ Trust, Series 1 (QQQ) ETF.

What’s the secret to the longevity of quant funds?

Quant hedge funds’ success is mainly dependent on how strongly their model understands the implication of the current market environment. Failure to do so can lead to a fund’s closure.

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