The Quants Are Taking Over

The WSJ runs a story today on the emergence of quant funds:

Up and down Wall Street, algorithmic-driven trading and the quants who use sophisticated statistical models to find attractive trades are taking over the investment world.

On many trading floors, quants are gaining respect, clout and money as investment firms scramble to hire mathematicians and scientists. Traditional trading strategies, such as sifting through balance sheets and talking to companies’ customers, are falling down the pecking order.

“A decade ago, the brightest graduates all wanted to be traders at Wall Street investment banks, but now they’re climbing over each other to get into quant funds,” says Anthony Lawler, who helps run quantitative investing at GAM Holding AG . The Swiss money manager last year bought British quant firm Cantab Capital Partners for at least $217 million to help it expand into computer-powered funds.

Guggenheim Partners LLC built what it calls a “supercomputing cluster” for $1 million at the Lawrence Berkeley National Laboratory in California to help crunch numbers for Guggenheim’s quant investment funds, says Marcos Lopez de Prado, a Guggenheim senior managing director. Electricity for the computers costs another $1 million a year.

Algorithmic trading has been around for a long time but was tiny. An article in The Wall Street Journal in 1974 featured quant pioneer Ed Thorp. In 1988, the Journal profiled a little-known Chicago options-trading firm that had a secret computer system. Journal reporter Scott Patterson wrote a best-selling book in 2010 about the rise of quants.

Prognosticators imagined a time when data-driven traders who live by algorithms rather than instincts would become the kings of Wall Street.

That day has arrived. In just one sign of their power, quantitative hedge funds are now responsible for 27% of all U.S. stock trades by investors, up from 14% in 2013, according to the Tabb Group, a research and consulting firm in New York.

Quants have almost caught up to individual investors, which outnumber quants and collectively have 29% of all stock-trading volume.

At the end of the first quarter, quant-focused hedge funds held $932 billion of investments, or more than 30% of all hedge-fund assets, estimates HFR Inc. In 2009, quant funds held $408 billion, or 25% of all hedge-fund assets.

Quants got $4.6 billion of net new investments in the first quarter, while the overall hedge-fund business saw withdrawals of $5.5 billion.

The computers are outperforming humans at picking investments. In the past five years, quant-focused hedge funds gained about 5.1% a year on average. The average hedge fund rose 4.3% a year in the same period.

This is a good article and I recommend you give it a read. My only quibble, and it’s a small one, is that it seems late by about ten years. These trends have been building for a long time.

Posted by on May 22nd, 2017 at 3:43 pm


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