Email of the day on systemic funds versus high frequency trading
Comment of the Day

April 28 2014

Commentary by Eoin Treacy

Email of the day on systemic funds versus high frequency trading

“Hello, I am writing to ask you if you could explain exactly the pros and cons of quantitative portfolio management. there are many advisors and fund managers who this quantitative method, I understand that the advantage is that asset management becomes automatic, math based, but I really don't know much more than this, from your book I have understood that you don't believe in this quantitative approach, is this correct?”

Eoin Treacy's view

Thank you for this question which may be of interest to other subscribers. Human beings are emotional and controlling our emotions is a skill many struggle with. While buy-low-sell high is a simple dictum it often runs contrary to our emotional instincts particularly following extreme moves in both directions. 

As a result, there is a perception among some investors that if human tendencies to buy and sell at the wrong time are minimised investment returns should be more stable. Of course the success or otherwise of such strategies is totally dependent on the prowess of the human programmer creating the strategy and the inputs he/she considers relevant. 

While the proliferation of quantitative strategies is coincident with that of high frequency trading because both benefit from improvements in the speed and cost of computing they are not the same thing. 

High frequency trading deals in much shorter holding periods and can be equated with scalping and front-running rather than a buy and hold strategy many funds pursue. 
In many respects the success of investors lies less in spotting trends as they develop but rather in adapting to conditions as they evolve when trends mature. This is an aspect of investing many algorithmic strategies have difficulty with. What models well in controlled back-testing tells us what would have done well in the last cycle but not necessarily what will do well in the next one.


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