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 $1million 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.
Quants certainly appear to be a more varied and ethical business model than high frequency trading (HFT), where firms were spending fortunes trying to get slightly faster access to the markets so that they could pre-empt other orders. HFT appears to be far less popular than a decade ago.
The performance of Quants varies but they are much less susceptible to the go for broke gambles which we have seen too frequently in recent years from various hedge fund managers.
Will Quants succeed and if so for how long?
They are succeeding at the moment but are only the latest interim stage in a steady evolution of computer assisted fund management which will eventually end with artificial intelligence in full control. Humans may not be the beneficiaries.
Here is a PDF of the WSJ's article.
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