What Are the Best Tips for Quantitative Investment Management?

Jim B.

Quantitative investment management refers to the process by which individual investors or professionals they hire allow mathematical models and computer programs to select the investments to be made. This process requires that any psychological prejudices and gut feelings be left out of the decision-making, which is dependent entirely upon numbers and statistics. The best way for investors to practice quantitative investment management is to do diligent research on the investment strategies which they plan to choose, both to make sure of their success rates and to ascertain whether or not those strategies match their investment needs. Investors should also be flexible enough to make changes if they feel that their quantitative strategies are underperforming.

Quantitative investment uses mathematical models and computer programs to help choose investment vehicles.
Quantitative investment uses mathematical models and computer programs to help choose investment vehicles.

Many investors are willing to make investment choices based on their own whims and feelings about stocks, bonds, and other investment vehicles. Others feel that the behavior of a given market can be predicted based on the way it has performed in the past. Investors of this second type would be more likely to practice quantitative investment management than others, but they must be aware of both the strengths and limitations of this process.

There are, in general, two ways to approach quantitative investment management. Some investors choose to pick a model that tracks a specific market as a whole. The theory behind this is that a market that is ready to rise will carry most investments with it. This approach is based on timing. By contrast, other quantitative strategies focus on tracking the performance of individual investments, attempting to locate specific stocks and other vehicles that might be undervalued by the market.

The method of quantitative investment management that an investor chooses should be based on his or her individual needs. An investor looking for long-term growth might be better off with a strategy that targets individual stocks, while those looking for quick results might be better suited with strategies that try to predict rapid price swings. In either case, investors should do research to verify that the individual models they choose have proven to be consistently successful over time.

Discipline is a key component of any quantitative investment management strategy. In other words, investors must have the courage to ride out some poor results if they truly believe in the methods they have chosen. On the other hand, there are times when real-world events cause a sea change in economic conditions that statistical models might not be able to predict. When this occurs, investors should be ready to change course from even the most successful quantitative strategies.

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