Quant versus Systematic Trading

I had an interesting discussion at a Bloomberg event recently where I was peppered with questions regarding some of the mathematics and complexity that we utilize at our fund on a daily basis. I replied simply that we are more systematic or rule-based traders then highly analytical quantitative traders.When I responded that I have found simplicity to work very well, I had the feeling that individual was somewhat dissatisfied with the response.

After finishing a beer, I gathered my thoughts and put it as succinctly as I could. The gist of my argument was based on the assumption that a profitable equity curve, WHEN RIGOROUSLY TESTED, can imply all other methods of statistical measurements are satisfied. So for example, if you test XOM versus CVX in a straightforward log ratio pair test and you are happy with risk-adjusted returns and have utilized good method (out-of-sample testing, slippage, commission, etc.) then this should imply there is co-integration and it is not immediately necessary to test for it. Additionally XOM versus CVX qualitatively makes sense as well which I think many quants pass over a quick, rudimentary qualitative assessment of ideas.

Similarly lets say you are researching some ARIMA method or GARCH forecast, while the math may require research the ultimate arbiter is profitability of a rule based trading system. After researching thousands of various strategies and implementing 50 or more strategies, I have found that even the best equity curves and most thoroughly researched trading strategies can and do fail. Sometimes focus is misplaced on the entry and not the risk management; when will I know that this strat is bunk? A couple quick methods:

  • White’s Reality Check
  • Serial Correlation in the return stream (equity curve trading)
  • Portfolio Construction
  • Qualitative Measures

Finance is not time-series analysis, you are dealing with a random process most of the time until its not. Lol, hope that helps? I would really encourage anyone with a different viewpoint to comment so I can learn a thing or two….

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~ by largecaptrader on July 22, 2009.

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