Quantitative Investment: an effective supplement to traditional qualitative investment

Author: Tao ronghui, Assistant General Manager and director of the quantitative investment department of Harvest Fund

Today's stock investment can be divided into two camps: active investment and passive exponential investment. The fundamental difference between active investment and passive investment lies in whether the investment manager's investment goal is to win excess profits from the market or simply obtain the average profits from the market. The theoretical basis of passive exponential investment is that the market is highly effective, and any attempt to defeat the market is futile. The theoretical basis of active investment is that the market is not effective or weak. Investment Managers can establish a combination to defeat the market and generate excess profits by analyzing and studying the fundamentals of individual stock valuation and growth, that is, we often mention Alpha. Any investment strategy that is different from pure exponential investment is proactive investment. Based on the investment style and methodology, it can be divided into proactive quantitative investment (for the sake of convenience, "quantitative investment" or "quantitative stock fund") and more familiar qualitative investment.

 

Quantitative stock funds are still a stranger to most investors, although they have been developing in mature overseas markets for more than 30 years. From BGI (Barclays Global Investment Company) released its first stock fund in 1978 to today, the quantitative investment method has been widely recognized by investors around the world. Among the active stock funds released in the U.S. retail market, quantitative shares account for 16% of the market, with diversified dispersion. The disciplined investment style also creates better profits for investors after risk adjustment. In the highly competitive institutional investment market, quantitative investment has gained greater attention, with BGI and GSAM (Goldman Sachs Asset Management) A large number of companies with quantitative investment as their core competitiveness have become the dominant Asset Management Companies. BGI is 10 thousand billion yuan in size, ranking first in Global Asset Management. Quantitative investment methods have also achieved great success in the world of hedge funds. The famous Renaissance technology company has achieved a net income of 40% every year in the past 20 years using quantitative investment methods, the 40% fee also deducts 5% of basic management fees and 40% of performance fees.

 

Compared with quantitative investment, you are more familiar with qualitative investment. Qualitative active investment is characterized by its investment process, which is based on in-depth fundamental analysis and research, supplemented by research on listed companies, communication with management, and various research reports. The portfolio decision-making process is that the fund manager selects individual stocks based on subjective judgment and intuition After integrating all the information to build a portfolio to generate excess profits.

 

The portfolio decision-making process of quantitative investment is completed by the system. But this does not mean that the driving force of quantitative investment is mathematics. In fact, the foundation of quantitative investment is also a profound understanding and meticulous analysis of the fundamentals. Its essence is the rational application of qualitative ideas. Based on the understanding of the market, quantitative fund managers extract investment ideas that can generate long-term stable excess profits, and use historical data to verify the correctness of their ideas. Common ideas for quantitative investment include:

 

Valuation: Analysis of valuation changes to discover undervalued stocks in the market for excess returns

 

Growth: discovering stocks with higher profit growth than expected; profit quality: Exploring enterprise profitability, focusing on high-quality and sustainable profitability; behavior finance: seize trading opportunities caused by market over-response and insufficient response.

 

Unlike qualitative investment, portfolio construction of quantitative investment is done by the system. Based on the extracted investment ideas, the system selects stocks that meet the standards in the whole market, and generates the optimal stock combination through optimization of earnings and risks. This systematic combination construction method has the following advantages over the traditional qualitative investment combination based on subjective judgment:

 

Investment width: the ability of the human brain to process information is limited, and modern computer systems can efficiently and accurately process massive data. Compared with qualitative fund managers, quantitative fund managers can find investment opportunities and obtain excess profits in the entire market by leveraging the powerful information processing capabilities of the system.

 

Investment objectivity: systematic portfolio construction can minimize the impact of human emotions on the portfolio, and more objectively reflect the investment philosophy of fund managers.

 

Verifiable investment philosophy: quantitative investment uses historical data to verify the applicability of investment ideas in different economic cycles and market environments. This truly achieves "bold assumptions, careful proof ", stability and sustainability of excess returns are ensured.

 

Risk Control: The quantitative investment system analyzes the investment income and risks, optimizes the combination, and maximizes the expected excess income on the basis of effective risk control.

 

Of course, quantitative investment also has its limitations, such as strong dependence on historical data and lack of full understanding of the company's management mechanism. In fact, any investor method inevitably has its advantages and disadvantages. Active qualitative investment and active quantitative investment can generate excess profits if used properly. In the past 20 years, Buffett, the head of qualitative investment, has achieved more than 20% of annual earnings through precise judgment on company management, finance, value, and growth, simmons, the leader of quantitative investment, and its managed Renaissance hedge fund, have also achieved brilliant results over the past 20 years through quantitative modeling and systematic investment. There is no conflict between quantitative investment and qualitative investment. The rational investment style based on fundamental analysis is just an effective supplement to traditional investment methods. As an ordinary investor, should I add quantitative funds to my portfolio to spread investment risks and achieve more stable return on investment?