What is Quant?

Merrill Stillwell | Partner and Jon Tesseo | Director - Operations & Research

So…. What is quant investing? A computer tells you what stocks to buy? Huh?

Well, yes. At its most basic: quant investing is writing down a bunch of investment rules and using them score and rank stocks.

Instead of getting a hot stock tip from Jim Cramer or a friend, a quant investment process evaluates a company on its fundamentals. Is the stock cheap? Is it high quality? Does it have too much debt?

The goal is to analyze companies without the bias that comes from human emotions. Instead of looking at companies that “sound” cool or have charismatic leadership, quant investing identifies good investments with data.

Sound easy? It gets more complicated. So what is “cheap?” Investors have a bunch of different definitions. They can look at the price of the company relative to the income it makes (E/P), the cash it produces (FCF/P) or how much stuff it owns (B/P). The quant process starts with academic research and investment insights and then uses large data sets to figure out what has driven returns in the past and what is most likely to drive returns in the future.

A full quant process will test individual ideas (also called signals or factors) and combinations of these ideas through multiple time periods to analyze how these ideas contribute to both returns and risk. Do cheap AND low debt companies work out better? What does the whole portfolio look like if you buy a bunch of these companies that get identified?

A neat trick relying on math: quants can use the same equations to quickly evaluate thousands of companies. A computer can crunch millions of data points and evaluate stocks in combination and through time.

Quant groups use a process like this to develop a specific strategy. Some examples could be:

· Finding great stocks to hold for the long haul

· Searching for companies that are likely to underperform

· Trading in and out of stocks in seconds

· Following macro trends

· Specializing in one niche

And then that process never ends. Certain signals can become less reliable because the competition also finds them or markets change over time. New datasets can unlock new ideas. New technology can help identify the next great source of value. A quant team will forever need to test and improve a strategy.

Within this world of quants, 5^th Horizon picks stocks to hold long term that include small, medium and large companies listed in the USA (via the S&P 1500 index). Our strategy is designed to deliver strong risk-adjusted and tax efficient returns in every market cycle.