Quantitative Investment Management
Quantitative investment management says, “Don’t worry about investment management, and let to do the job for the computer”. It is a completely different approach compared to ‘value driven’ investment philosophy, which is a background for this website about investment.
However, I don’t believe (author’s note) in quantitative investment management and similar techniques too much. Maybe one day, when computers will be really much smarter than human brains, quantitative investment management becomes the only way to invest. But I doubt that this going to happen very soon. Until that I will better to take care of my investments by myself…
Still a lot of big investment management institutions use quantitative investment management methods as it allows to make procedures more automatic and to avoid human error. Mostly quantative techniques are employed in hedge funds.
The main advantage of quantitative management is immunity to psychological weaknesses and herd instinct. It is not a secret that most of investors sell their stocks when fears overwhelm consciousness and most of the times that is happening when stock markets are at the bottoms. But you can avoid such mistakes without computer help, if you have a good investment strategy and follow it strictly.
The main disadvantage of quantitative methods is that they rely on statistics. But the problem is that investment market is always evolving while people learn from their mistakes. Different time means different reaction of the market and such reactions cannot be properly predicted by mathematical models.
Sooner or later we would come to market efficiency question which is still arguable between academicians. However, if someone succeeds to create value with help of mathematical models – that’s just fine. The only question is for how long it can work. I’m not sure if I have to remind here about Long-Term Capital Management L.P, which was managed by most talented economists and financial engineers.
There have been a lot of critics about quantitative investment management in this article, but maybe it is needed to say that every tool can be employed properly or mistakenly. Quantitative investment management models also bring value in professional hands if aren’t trusted blindly.