In a recent article for the Wall Street Journal, Jason Zweig offers some tips on how an investor can devise his own quant strategy. “Perhaps it is cheaper to learn from the quants than to hire them,” he argues.
Zweig shares findings of a Duke University group of researchers that found, during the period from 1996 to 2014, “systematic funds (which describe themselves with such words as ‘algorithmic’, ‘computer-driven’, or ‘statistical’) performed about the same as traditional ‘discretionary’ funds that claim to use human judgement to pick holdings.”
The complex algorithms used by many of Wall Street’s quants, Zweig suggests, could perhaps be replaced with a “handful” of variables. He uses the example of an investor adept at picking small stocks—suggesting that they measure their returns against those of an index fund holding most of the same companies. If they stack up, he says, then the investor could identify which criteria led to their success and measure each prospective company against those criteria.
If you’re considering investing in a fund, Zweig suggests applying “the simplest possible quantitative tests”:
- Ask whether the approach can be copied with one or more market-tracking index funds;
- Analyze the long-term return that the quant fund claims its strategy would have earned in excess of the index it compares itself with, then carve out the fund’s annual expenses and trading costs
Finally, Zweig concludes, “ask a representative of the fund how many strategies the firm tested before it settled on this one. If the person doesn’t know or won’t say, put your money elsewhere.”