The word quantamental has rapidly been growing in interest in 2017 with Google search frequency up nearly 300% from Jan 2017 to Sep 2017 and the number of pages up nearly 5x. This document was the FIRST (according to Google) definitive guide and FAQ on quantamental investing. It does not offer all of the details, but we seek to provide an informative guide from the perspective of someone that has invested billions of dollars professionally and a provider of alternative data consulting services.
Where is quantamental and what does it mean?
Quantamental combines two types of investment strategies, quantitative and fundamental. Quantitative investing generally uses Ph.D’s with complex algorithms, large computer systems and lots of data to invest in many securities. Fundamental investing uses analysis based on the bottoms up fundamentals of a company a la Warren Buffett.
How does quantitative investing work?
Using computer models and large amounts of current and historical data, quant investors try to predict the future prices of securities by looking at historically recurring patterns that look similar to current situations. The combination of data sources and patterns are called “signals” and used to predict the price of a security. Will it continue its trend(“momentum”) or will it reverse direction (“mean reversion”)? Important “signals” that define the performance and characteristic of a stock are called “factors” or risk factors. By far the most commonly used and successful factors over time have been Value (cheap stocks) and Momentum (stocks that are working). Surprise, surprise. Other popular ones are Growth,Volatility, Leverage, Size and Profitability.
Useful signals are available in many datasets from both traditional data as well as alternative data.
What does quantamental investing generally mean?
The term generally refers to either fundamental investors adding some type of quantitative analysis or vice versa. Factor based idea screening provides an easy quantitative concept for fundamental investors. This means that fundamental investors will use an idea generation tool that uses factors. This creates a small pool of ideas to spend more fundamental research on. One screen could be “Find me the cheapest stocks and with the highest momentum by quartile/quinitle”. There are obviously more robust approaches to this that involve complex software. Another often mentioned quantamental approach uses using alternative data (see below).
Going quantamental helps fundamental investors performance since it : A) increases the level of discipline and process and B) leverages the power of machines. Unfortunately, the investing industry generally avoids change and we are likely years from a more systematic approach to fundamental investing.
Why is quantamental becoming an increasingly popular term these days?
Quantamental is a term more often used by fundamental investors. Traditional active investors have two huge problems which this approach helps address: A) poor performance leading to asset outflows and lower revenues and B) high employee costs. This investing style adds discipline that reduces the emotional error that humans often make. It can also require a fewer number of expensive human investors.
More quantitative firms think about quantamental as their normal course of business.
What is alternative data? How is it used?
Alternative data often gets mentioned as part of quantamental analysis. The term generally refers to data from non-traditional sources. The most commonly referenced examples in the press are satellite images, app usage, credit card spending data and foot traffic.
Alternative data is becoming increasingly popular. The initial focus has been on “nowcasting”, identifying opportunities where consensus estimates are too high or low based on current information. But, the greater opportunity is building the mosaic of information on a company.
If everyone starts to know the winning factors and signals doesn’t this drive down returns for quant investors?
Yes! We are getting close to peak quant investing hype which seems to happens about every 10 years. The hangovers are usually pretty rough. Here’s a short history:
1987 — Portfolio insurance peaks then has a large hand in the Oct crash.
1998 — LTCM rapid rise then liquidation.
2007 — Goldman’s Global Alpha fund peaks at $12b before poor performance and eventually closing
But, during these types of bubbles, a virtuous cycle starts. Investors chase performance which adds assets to quant strategies. They in turn buy the stocks that are also owned by the other quant funds which further increases performance and inflows. The smartest guys in the room are even smarter when they’re winning. Wall Street loves to chase returns and what has worked.
Realistically, no new factors have really been identified in years. While investors are identifying new signals, the correlation with existing signals is often fairly high. But, we can count on Wall Street taking things to excess until the hangover comes.
Can the average retail investor implement quantamental investing?
Not exactly. At a stock specific level, it’s not realistically possible for retail investors to implement a quantamental system. But, there are a range of Smart Beta ETFs and products that implement these quantitative factors in a systematic way. Blackrock does a good job of explaining this.
If you have any feedback or suggestions for improvement to this document, feel free to leave a comment or email me (email@example.com).