The word ‘Quantamental’ comes from an amalgamation of two methods of investing in one very powerful technique. It combines the quantitative approach of computers and statistical modeling with the fundamental analysis of financial and economic factors affecting securities. Fundamental investing has been reigning the investment scene for a very long time. However, with the rise in Machine Learning and Artificial Intelligence, the ability to crunch large amounts of data and bring out meaningful inferences from these has brought with it a lot of promises. It is the era of Big Data and getting hold of large amounts of data relating to finance has become really easy.
Fundamental analysts take into consideration competitive advantages and ROI. They visit organizations and have man-to-man interactions with management. However, human beings can only do so much and are incapable of managing or processing large amounts of data. Quantitative asset management firms, on the other hand, use statistics and probabilities and systematically work on large amounts of data from varied sources. Their work is, however, generally shorter term oriented. This is because pure quantitative techniques tend to neglect the qualitative reasoning behind an investment decision.
The fundamental approach does work well and brings in great results, thanks to market-savvy and experienced stock pickers who know what they’re talking about. However, with the huge amount of data available today, not using it effectively means missing out on some great opportunities.
How is Quantamental Investing different From Traditional Approaches?
Traditionally, fundamental and quantitative investing were treated as two separate modes. Fundamental investors used old-fashioned ways, relying on research and pure human instinct to spot the best places to invest. Quantitative investors, on the other hand, used cutting-edge computer algorithms to search large amounts of data for latent prospects and then made ground-breaking decisions.
However, in recent days, companies like Larry Fink’s Black Rock Inc. and few others are combining the benefits of both these approaches to extract the power of big data in Quantitative methods and the business sense of experienced professionals who use the fundamental methods. The result is a much more focused decision with the higher promise of returns.
Quantamentalists are basically fundamentalists who make use of quantitative techniques for a more informed direction. They may employ data scientists or Machine Learning experts to build algorithms that scour through large volumes of data to look for trends, which can then provide the fundamental human stock pickers a more concise form of information to work on and analyze further. In other words, they leverage the power of modern technology and Big Data to add to the abilities of investors and their assessments.
Where is it Being Used?
Quantamental Investing is being increasingly incorporated in the investing industry, from small boutiques to large asset management empires. They are mainly being used by hedge funds for stock and securities assessments. They are also being used to analyze data with the aim of managing risks. Organizations like JP Morgan have already invested trilions of dollars in the business incorporation of QI techniques. Other organizations like Bridgewater and Goldman Sachs are slowly easing into the use of QI strategies, while WorldQuant and Sentient Technologies are using Artificial Intelligence for their trading decisions.
JP Morgan set up a new data lab in their “intelligent digital solutions” division with the aim of adding to the competencies of their portfolio managers, instead of simply letting AI replace them altogether. The unit works on automating routine tasks, like pitch books and aids in the more high-end requirements like product creation and investment strategies. They are using Neural Networks to crunch large amounts of data in corporate earnings call transcripts to catch ‘problem’ words or phrases which tend to lead to trouble in the market. Their asset management data scientists are in the process of creating an alert system for portfolio managers to know when a particular conversation is particularly negative or positive.
This new approach, though powerful, is not equally welcomed by all hedge fund managers. Many argue that they are not as fair or objective as needed. However, this is the direction the world is heading at the moment. It would be wise to embrace the new technology, rather than fight it and lose the race.