What are Quant Hedge Funds and Why Should You Care?

Published by Sam Roberts on

At Talent Ticker, our mission is to keep you informed so that you can make the right recruiting decisions. As part of that mission, we’re starting a series that will act as a mini-guide to the more complex or recently-spawned company types, giving you the info you need to dedicate your all your time to securing those leads.

Today, we’ll be looking at Quant Hedge Funds, as a nice and easy starting dip into the whirlpool that is the financial services industry.

What distinguishes a QHF from a traditional Hedge Fund?

The main difference between Quant Hedge Funds and normal Hedge Funds is that Quant Hedge Funds (QHFs) rely upon Quantitative Analysts to develop their investment strategies. In case you didn’t already know, Quantitative Analysts (or Quants, if you want to sound cool) are used by companies across the financial services spectrum to identify profitable investment opportunities and manage risk, by crunching a whole lot of financial data through statistical models and algorithms.

Normal or “discretionary” Hedge Fund will use humans to analyse opportunities directly and make investment decisions based upon the discretion (hence the name) of the Fund Manager, a QHF will use quantitative methods to create a rule-based strategy that, at least partially, automates the trading or investment process.

So, what are the benefits?

By looking at historical data, Quantitative Analysts can chart patterns in the life of a security or market and identify risks, such as volatility, or the kinds of events which can affect a security’s value. But historical patterns can only take you so far, as the past doesn’t always repeat itself, and the future has a nasty tendency to be unpredictable. That’s why QHFs usually utilise two other forms of analysis: technical and fundamental. Technical analysis uses data from short periods of time to chart patterns in the movement of securities, providing insight into the short-term future of a security or specific market. Fundamental analysis, on the other hand, is used to evaluate the long-term value of a security, market, or even a specific company. These three analytical methods can be combined in any way, shape, or form, and to any degree you fancy, allowing QHFs to more greatly diversify their strategies and the assets they can target.

The future of Quants

Quant-powered funds are rapidly growing in popularity, with 85% of all trading in 2018 completed either by machines, models, or passive investment strategies like the ones QHFs deploy. But with the rise in popularity comes the fear of overcrowding. Investment returns have been lacklustre for many funds since 2014 as most companies are now moving with the speed of a computer and are finding it harder to stay ahead of each other. Needless to say, with the loss of money comes the rejigging of strategies, but that doesn’t mean the death knell has been sounded for QHFs just yet. On the contrary, in a sector young enough to have not yet finished its first long-term downturn, and with QHFs will always be on the look-out for the brightest Quants in the firmament, so they can stay ahead of their competition.

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