Quantitative Investment Strategies

[Jessie]

There are certainly many overseas share funds and hedge funds that invest using a pure quantitative approaches, eg, AQR Capital Managament have funds which mechanically select stocks based on Value and Momentum. These funds rely on market inefficiencies and can beat the market by a few percentage points over time. In principle an individual investor could replicate this approach. However, to remain diversified, you would need a reasonable number of stocks. A system using only few stocks would be too volatile for any outperformance to be apparent. If you used selected at least 20 stocks to reduce volatility, and your system required trading these fairly frequently, then transaction costs for a small investor might eat up any outperformace. However, it is an interesting idea.

I have also seen some articles by Meb Faber who describes a system of selecting a ETFs based on various criteria such as Momentum and Value. This system could be applied by a small investor and should work with only a small number of ETFs. It attempts to reduce volatility as well as improve returns compared with a buy-and-hold strategy. However, the ETFs he uses are only available in the USA at present. Also, he judges performance based on back-testing, but there is no guarantee that future performance will achieve comparable results.

[Snow Leopard]

Quantative? Quantatitive? No?

Quantitative!! - OK got it right - Copy & Paste for the rest of the post

Quantitative Investment Strategies, which I am going to define as 'Rule based investment processes using predominantly numerical data as the input sources' is a much wider field than you are portraying Jessie.

Even I am a few dollars short of the amounts of money that AQR and friends have to chuck around the markets.

So to use an old quantitative expression you 'Cut your Coat to suit the Cloth' and look for a strategy that fits your circumstances, if you only have enough funds for a few stocks then you look for an approach with a good statistical chance of meeting your goals whatever you decide they are with a few stocks.
Such a strategy could well involve minimal rearranging of weightings.
It will also certainly be more volatile than the big boys achieve but may be just as successful.

Past performance is no guarantee of future profits but back-testing over a broad range of market data is very useful to determine whether a system has any fundamental flaws or is likely to under perform in the long term.

Best Wishes
Paper Tiger

[Grunter]

Would make for a good Master's thesis! Studying whether this could be done in NZ by a "retail" investor.

[percy]

Thanks Percy.

My argument against Qualitative Investment, is this: What makes you think you have any greater insight into a company than the professional analysts that cover these stocks? Because in order to beat the market consistently, you need to have a better insight than the rest of the market.

Grunter;
Google Long-term Capital Management,and read just how well two Nobel memorial Prize winning economists, and a bevy of renowned financial wizards did.

[Grunter]

Grunter;
Google Long-term Capital Management,and read just how well two Nobel memorial Prize winning economists, and a bevy of renowned financial wizards did.

LTCM blew up due to the insane amounts of leverage that they needed to make their strategies as profitable as expected. This is more to do with poor risk management than poor investment strategies. The strategies worked well until a rare and unexpected event caused those strategies to unravel. Less-leveraged firms would have been able to dial back and liquidate, preserving their capital until the markets became normalised again.

That's the key with these funds that blow up - usually its due to their risk management of leverage rather than the underlying strategy itself.

[peat]

rare and unexpected event

funny how these happen so often...

fattailb.jpg
look how the cute lil thing got such a fat tail!

[Lego_Man]

Grunter,

This may interest you.

https://www.harbourasset.co.nz/fund/advanced-beta-fund/

I believe this fund is systematically run, based on regularly calculated Piotroski scores for NZX listed stocks.

http://www.investopedia.com/terms/p/piotroski-score.asp

[peat]

...optimise your portfolio weightings to maximise the return/risk ratio (sharpe ratio). Then you rebalance your portfolio every three months according to the above rules.

That's a simple quantitative strategy used by professional fund managers.

My take is that there is no reason that there is no reason this cannot be successful to a retail investor.

Actually Grunter, I did this in my graduate diploma in 2010. It was slightly simplified with two, two stock portfolios I chose Kraft & Activision, vs Kraft and Comcast.



Sharpe Ratio.JPG

[heisenberg]

Next bit is to optimise your portfolio weightings to maximise the return/risk ratio (sharpe ratio).

Welcome Grunter. As a retail investor, could you give me a brief rundown as to how to do this - or point me to the place where I can find out?

[Grunter]

Welcome Grunter. As a retail investor, could you give me a brief rundown as to how to do this - or point me to the place where I can find out?

Heisenberg - I posted a youtube video that shows you how to use matrix operations in excel. Hope this helps.