Quantamental, A dynamo of predictive power that is redefining the way fund managers oversee their portfolios.
What is Quantamental investing?
As the name suggests, this cutting-edge strategy combines quantitative and fundamental research to create a dynamo of predictive power that is redefining the way fund managers oversee their portfolios.
Let’s consider these two approaches separately for a moment.
If you’re working for a fundamental investment fund, your aim is to get a large edge on a relatively small number of stocks over a longer holding period. So, your firm would be looking at something like 75–200 positions over a period of say 12–24 months. If you’re a fundamental analyst, your mind will be preoccupied by market share, return on capital, valuation and competitive advantages. Your M.O. will involve getting in the thick of things: building financial models and meeting with management.
If you’re working for a quantitative investment fund, you will likely know less about each stock. But this isn’t a disadvantage because you have other weapons in your arsenal. Not the least of which is an impressively deep understanding of the statistics and probabilities that drive the market. Your firm probably also have significantly more assets and are likely to have far more positions than your fundamental counterparts. The goal is to gain alpha edge in smaller amounts but from a much larger base, adding up (if all goes to according plan) to impressive returns.
How do you get fundamental and quantitative strategies work cohesively?
Bringing these two approaches together into Quantamental investing results in the creation of a data-driven model that leverages quantitative insights throughout the investing process.
In an industry that boasts only a few truly gifted quantitative research experts, the additional requirements of this next-level system are demanding to say the least.
Excelling at quantamental investment requires a background in both statistical and fundamental research and (ideally but rarely) software development too. This is why so few hedge funds are able to take on the quantamental method. As They’re not reliant on one strategy or skillset alone and, with more dimensions available to them with their multi-pronged research approach, their ability to predict trends is unparalleled.
Behavioural Analysis: the key to consistent success in an inconsistent market
There are many competing schools of thought when it comes to market analysis and investor psychology. However, you’ll find most economic theory is still based on the premise that people take calculated, action when it comes to financial decisions; that they always act rationally when it comes to their money.
Known as “the efficient market hypothesis,” this assumption implies that, since decisions are being made rationally, market prices are always a correct reflection of true worth. This, in turn, suggests the market is a virtually impossible thing to beat. While beating the market may seem like an impossible dream to many investors, success stories like that of Warren Buffett prove the market is a beast which can be tamed. the fact that the market can crash offers evidence that stock prices can (and do) deviate far from their genuine worth.
This is where taking an opposing view to the popular rhetoric and delving into behavioural finance can give you a remarkable edge over other investors. There are many factors which influence investors into making irrational decisions where you would expect rational ones.
Understanding human emotions and the way they drive action allows you the ability to factor them into your calculations and predict what was formerly thought of as unpredictable.