Quant Funds: Obstacles and Opportunities

Quant Funds: Obstacles and Opportunities

Capital Markets CIO Outlook | Tuesday, February 19, 2019

There are some shortcomings of quantitative hedge funds that can be exploited by skilled professional traders. First, high volume trading algorithms: high capacity constraints usually lead to weak models and lower profits at high trading friction. Professional traders can take advantage of this restriction by focusing on comparatively faster ETF trading indexes. The result is that the hedge funds end up trading individual stocks at worse prices. The use of fast algorithms is another advanced way to benefit from capacity limitation. HFT traders are already doing this, but traders with medium to low frequencies can help if the lag is small.

Most hedge funds require performance with low market correlation, which means as close to zero as possible to a beta. That excludes a large class of highly profitable models, but, on a risk-adjusted basis. Nevertheless, this rules out a large class of profoundly valuable models on a risk-adjusted basis.

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Professional traders can use models that have a higher beta, but in turn, which reduces the profit potential of hedge funds that require a lower beta.

Relying on academic researcher advice is often believed to be a reliable source of analysis and prediction. However, in reality,  there is a massive difference in the frame of mind between academic researchers and professional traders whose skin is thick in the game. Researchers use weird terminology to create hype and make an impression. In trade, it is much more important to know when market conditions change than to estimate data mining bias. An over-mounted model can be a good solution if market conditions remain the same.

Many quantitative funds are doomed since they don’t factor in the market forces that affect trading in general. Algo-trading concentrates on ML, back-testing, data mining, and platforms, which is less than 50 percent of the execution. Algo-traders need to keep a tab on implementation, support, and dealing with the unintended consequences of the trade.

New quantitative funds have many constraints that traders can reap the benefits of and make profits. Quantitative hedge funds may be a silly source for the traders, but people who are managing are experts.

Few Hedge Fund companies - ArcesiumEnfusionHarvest Exchange,...

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