What is a Quant Trader? | Systematic Investing | What is a Quant Hedge Fund? | Trading Ideas

Todays video is all about quant trading or investing. I have been a quantitative trader for over twenty years, and one of the most frequent questions I get in the comments section of my videos is what does a quant trader or quant hedge fund investor actually do. In this video we will talk about the different approaches followed by quant traders and discretionary traders and we will talk about the typical backgrounds of quantitative or systematic investors. What is a Quant? Quant is short for Quantitative or Quantitative Analyst on Wall Street.

Hello and welcome back to patrick doyle on finance today’s video is all about quant rating or investing i’ve been a quantitative trader for over 20 years and one of the most frequent questions i get in the comment section is what does a quant trader do so let’s answer that question today ok so a trader is simply a person who buys himself financial assets in any

Financial market either for themselves are on behalf of another person or institution the main difference between a trader and an investor is their time horizon or the duration for which they plan on holding the asset investors tend to have longer time horizons while traders tend to hold assets for shorter periods of time usually to capitalise on short-term price

Changes most traders rely on intuition or experience and might follow rules that they’ve either been taught by a mentor when they got their first job trading or they might rely on a technical analysis world that they read about it will say a book or on an internet forum systematic of our quantitative traders don’t rely as much on intuition instead they rely on the

Quantitative analysis that they do on the markets that they trade a lot of the trading rules that i found over the years have been counterintuitive they might be based in behavioral finance and involve will say buying when your natural instinct is to sell or vice versa one of the benefits of trading systematically is that you devise a game plan in advance and

Then allow a computer to enter the actual trades and that way you avoid making the mistake of overriding your system when it feels uncomfortable a non systematic trader might feel that based upon their experience whenever the market will say is moving up sharply they might think that it tends to continue a systematic trader might have a very similar feeling but


A systematic trader will then take some market data and then analyze it to see if their instinct was right or wrong they might in addition analyze the data to work out how best it can risk manage a trade like this how long they should hold for should they cut their losses quickly if the trade is not working out or should they hold on longer and all of these ideas

Are testable and if something is testable you probably should test them systematic trading firms usually value quantitative skills highly they need people with these skills to analyze all of the data that’s available in the markets and there really is a lot of data available so a lot of analysis needs to be done kuan traders don’t just build a trading model and

Lever to trade then usually maintain a healthy skepticism about their trading models quant are usually aware that no trade works 100% of the time and that even great trades can eventually stop working quant pay attention to events that invalidate their strategies or events that are not captured in their data sets a historically low interest rate environment for

Example begs questions of how to risk manage bond positions there may be concern about risk being skewed against long positions with rate rises being may be more likely than false does in an example like that we would develop ways to measure skew and optimally feed it into all bets not just interest rate bets a general solution is found for a general problem most

Quant raters have a good understanding of statistics financial derivatives in corporate finance and if you’re interested in these topics do check out the links in the description below for my books which were written to give readers a practical understanding of these topics they’re written in a way that the information can be used pretty much right away on the

Trading floor often quon traders have backgrounds in numeric disciplines like things like mathematics engineering or physics but then they usually also need to learn about finance to overlay that on sort of mathematical or statistical knowledge they would have quad firms gem we trade the largest most liquid markets that are out there these are things like liquid

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Futures and forwards markets large cap stocks and vanilla options markets the key thing is not so much how larger positions are but how large they are when compared to the market that you’re trading in finance we use to turn the quiddity to describe how easily you can enter or exit your positions without moving the market with your trades quantitative investors are

Usually very focused on things like transaction costs and liquidity in the assets that they trade and allocations to these assets are usually scaled accordingly a focus on data and technology allows quant traders to accurately estimate trading costs on any asset for their portfolios and to estimate and control the cost of liquidating these positions if necessary

Quant raters are sometimes accused of trading overly complex strategies that have no basis in reality but in fact quant start from the same point as discretionary or fundamental traders with a hypothesis or a theory about how markets might behave the hypothesis could be for example that the interest rates of two different countries predict the exchange rate between

The two for example or it could be that the slow reaction of investors to earnings news leads to momentum of asset prices and markets the key difference is that given a hypothesis quant raters take the next natural step of scientists they use the wealth of available historical data and available statistical techniques to learn about tests validate and refine the

Hypothesis and once this process is complete and only then they use the knowledge that they’ve gained to invest today there are many quantitative trading firm really long track records of profitable performance and you can think of these firms as a collection of scientists constantly collecting evidence in support of their style of investing like all investments

Quant funds are exposed to surprise market events things like central bank interventions geopolitical events or this year a global pandemic they are however no more exposed and traditional macro or fundamental traders are to market surprises like these the world is full of events that are very difficult or even impossible to predict upon traders edge might be that

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They can recognize this difficulty and confront it head-on kwan’s are well versed at recognizing the limits of statistical modeling and its ability to predict the rather than claiming expertise in specific assets quant usually aim to be diversified diversification can reduce a portfolios exposure to something like a surprise election result or a freak hurricane

In contrast an emerging market currency trader may have a little extra information about the countries they invest in but they’re typically much more exposed to idiosyncratic events which they can’t reasonably hope to predict reliably quant funds are often accused of being black boxes where the trading strategies are too complex for investors to understand and a

Lot of people say well if you can’t understand that you should stay away from it i would argue though that discretionary firms can be equally viewed as black boxes of discretionary firm is simply a collection of portfolio managers investing based on human intuition which is neither understandable nor consistent at least quantitative trading has the advantage that

Its process is precisely defined and it’s fully reproducible over history things like the computer or phone that you’re watching this very video on use complex mathematics and technology that most of us can’t hope to fully understand and most of us are prepared we’ll say for example to risk our lives travelling in an airplane that might be guided by satellites and

Uses extremely complex technologies it makes pretty much no sense to be happy with these technologies and then to balk at the idea of quantitative investing that has some complexity associated with it if you liked this video hit the like button and if you want to see more like it hit the subscribe button and the little bell button next to it talk to you later bye you

Transcribed from video
What is a Quant Trader? | Systematic Investing | What is a Quant Hedge Fund? | Trading Ideas By Patrick Boyle

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