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1.
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Definition
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A
quantitative analyst is a person who works in the financial markets
developing and implementing mathematical models to assist the
activities of traders and risk managers within investment banks,
hedge funds and other financial institutions. Throughout the
industry, such professionals are known as quants.
The disciplines of finance, mathematics, statistics and computer
science are now linked. A corporation whose risk management policy
compels it to lock in a foreign exchange rate must deal with a
foreign currency derivatives trader. The trader bases his pricing
and hedging decisions on the behavior of a Brownian motion,
determined by statistical estimation of parameters and simulated
under probabilities that differ from those of the real world, a
simulation justified by the profound mathematical and financial dual
ideas of change-of-measure and risk-neutral pricing.
Although the original "quants" were concerned with risk management
and derivatives pricing, the meaning of the term has expanded over
time to include those individuals involved in almost any application
of mathematics in finance. An example is statistical arbitrage.
Other Resources:
-
American Century
Investments:
Securities analysis that looks at a corporation's financial data
and projections.
More…
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Oasis Management:
Is the practice of using numerical techniques in researching
securities, markets, strategies and structures.
More…
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Capital Performance
Partners:
Quantitative analysis is a form of analysis, which uses numbers,
and ratios derived from a company's financials to assess its
prospects.
More…
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Finance Encyclopedia:
An assessment of specific measurable securities or investment
factors, such as cost of capital, value of assets; and
projections of sales, costs, earnings, and profits.
More…
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2.
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Examples, Types, or
Variations
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Quantitative
analysis with respect to trading equities generally includes the
following research topics:
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Annual
Reports
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Financial
Statements (Earnings, Revenues, Etc.)
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Publicly
Available Data
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General
Economic Data
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General
Econometric Data
Quantitative
analysis with respect to funds involves evaluating statistical
analysis of the trading manager’s track record. These include:
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Return
Analysis
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Compounded average rate of return
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Percentage of positive months
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Consistency
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Length of
Track Record
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Risk Analysis
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Volatility Measures
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Standard Deviation
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Monthly Standard Deviation
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Annual Standard Deviation
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Combined upside and downside standard deviation
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Downside Deviation only
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Drawdowns
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Maximum Drawdown
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Depth
of Drawdowns
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Frequency of Drawdowns
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Time
in any given Drawdown
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Recovery from a Drawdown
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Reward to
Risk
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Average
Return Divided by Maximum Drawdown
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(Total
Return Minus Risk Free Rate of Return)/(The Total of All
Drawdowns)
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(Average
Return)/(Maximum Drawdown)
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Sharpe
Ratio: (Average Rate of Return Minus Risk Free Rate of
Return)/(Annual Standard Deviation)
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Reward to
Assets Under Management
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Evaluating all of the above measures as a manager increases
assets under management
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The
average rate of return since the manager first had 50% of
their current assets under management.
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3.
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Formula
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4.
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Related Terms
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5.
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As
Used in the Hedge Fund World
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Quantitative finance started in the U.S. in the 1930s as some astute
investors began using mathematical formulas to price stocks and
bonds.
Harry Markowitz's 1952 Ph.D. thesis "Portfolio Selection" was one of
the first papers to formally adapt mathematical concepts to finance.
Markowitz formalized a notion of mean return and covariances for
common stocks which allowed him to quantify the concept of
"diversification" in a market. He showed how to compute the mean
return and variance for a given portfolio and argued that investors
should hold only those portfolios whose variance is minimal among
all portfolios with a given mean return. Although the language of
finance now involves Ito calculus, minimization of risk in a
quantifiable manner underlies much of the modern theory.
In 1969 Robert Merton introduced stochastic calculus into the study
of finance. Merton was motivated by the desire to understand how
prices are set in financial markets, which is the classical
economics question of "equilibrium," and in later papers he used the
machinery of stochastic calculus to begin investigation of this
issue.
At the same time as Merton's work and with Merton's assistance,
Fischer Black and Myron Scholes were developing their option pricing
formula, which led to winning the 1997 Nobel Prize in Economics. It
provided a solution for a practical problem, that of finding a fair
price for a European call option, i.e., the right to buy one share
of a given stock at a specified price and time. Such options are
frequently purchased by investors as a risk-hedging device. In 1981,
Harrison and Pliska used the general theory of continuous-time
stochastic processes to put the Black-Scholes option pricing formula
on a solid theoretical basis, and as a result, showed how to price
numerous other "derivative" securities.
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6.
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Applications
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7.
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Misused & Abused
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8.
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Additional Sources of Information
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Books
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News
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Scholarly Papers
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Back to Terms
| HEDGE FUND RISK AND OTHER
DISCLOSURES |
Hedge funds, including fund of funds (“Hedge
Funds”), are unregistered private investment partnerships, funds or
pools that may invest and trade in many different markets,
strategies and instruments (including securities, non-securities and
derivatives) and are NOT subject to the same regulatory requirements
as mutual funds, including mutual fund requirements to provide
certain periodic and standardized pricing and valuation information
to investors. There are substantial risks in investing in Hedge
Funds. Persons interested in investing in Hedge Funds should
carefully note the following:
- Hedge Funds represent speculative investments and involve a
high degree of risk. An investor could lose all or a substantial
portion of his/her investment. Investors must have the financial
ability, sophistication/experience and willingness to bear the
risks of an investment in a Hedge Fund.
- An investment in a Hedge Fund should be discretionary capital
set aside strictly for speculative purposes.
- An investment in a Hedge Fund is not suitable or desirable for
all investors. Only qualified eligible investors may invest in
Hedge Funds.
- Hedge Fund offering documents are not reviewed or approved by
federal or state regulators
- Hedge Funds may be leveraged (including highly leveraged) and
a Hedge Fund’s performance may be volatile
- An investment in a Hedge Fund may be illiquid and there may be
significant restrictions on transferring interests in a Hedge
Fund. There is no secondary market for an investor’s investment in
a Hedge Fund and none is expected to develop.
- A Hedge Fund may have little or no operating history or
performance and may use hypothetical or pro forma performance
which may not reflect actual trading done by the manager or
advisor and should be reviewed carefully. Investors should not
place undue reliance on hypothetical or pro forma performance.
- A Hedge Fund’s manager or advisor has total trading authority
over the Hedge Fund.
- A Hedge Fund may use a single advisor or employ a single
strategy, which could mean a lack of diversification and higher
risk.
- A Hedge Fund (for example, a fund of funds) and its managers
or advisors may rely on the trading expertise and experience of
third-party managers or advisors, the identity of which may not be
disclosed to investors
- A Hedge Fund may involve a complex tax structure, which should
be reviewed carefully.
- A Hedge Fund may involve structures or strategies that may
cause delays in important tax information being sent to investors.
- A Hedge Fund may provide no transparency regarding its
underlying investments (including sub-funds in a fund of funds
structure) to investors. If this is the case, there will be no way
for an investor to monitor the specific investments made by the
Hedge Fund or, in a fund of funds structure, to know whether the
sub-fund investments are consistent with the Hedge Fund’s
investment strategy or risk levels.
- A Hedge Fund may execute a substantial portion of trades on
foreign exchanges or over-the-counter markets, which could mean
higher risk.
- A Hedge Fund’s fees and expenses-which may be substantial
regardless of any positive return- will offset the Hedge Fund’s
trading profits. In a fund of funds or similar structure, fees are
generally charged at the fund as well as the sub-fund levels;
therefore fees charged investors will be higher that those charged
if the investor invested directly in the sub-fund(s).
- Hedge Funds are not required to provide periodic pricing or
valuation information to investors.
- Hedge Funds and their managers/advisors may be subject to
various conflicts of interest.
The above general
summary is not a complete list of the risks and other important
disclosures involved in investing in Hedge Funds and, with respect
to any particular Hedge Fund, is subject to the more complete and
specific disclosures contained in such Hedge Fund’s respective
offering documents. Before making any investment, an investor should
thoroughly review a Hedge Fund’s offering documents with the
investor’s financial, legal and tax advisor to determine whether an
investment in the Hedge Fund is suitable for the investor in light
of the investor’s investment objectives, financial circumstances and
tax situation.
All performance information is believed
to be net of applicable fees unless otherwise specifically noted. No
representation is made that any fund will or is likely to achieve
its objectives or that any investor will or is likely to achieve
results comparable to those shown or will make any profit at all or
will be able to avoid incurring substantial losses. Past performance
is not necessarily indicative, and is no guarantee, of future
results.
The information on the Site is intended for
informational, educational and research purposes only. Nothing on
this Site is intended to be, nor should it be construed or used as,
financial, legal, tax or investment advice, be an opinion of the
appropriateness or suitability of an investment, or intended to be
an offer, or the solicitation of any offer, to buy or sell any
security or an endorsement or inducement to invest with any fund or
fund manager. No such offer or solicitation may be made prior to the
delivery of appropriate offering documents to qualified investors.
Before making any investment, you should thoroughly review the
particular fund’s confidential offering documents with your
financial, legal and tax advisor and conduct such due diligence as
you (and they) deem appropriate. We do not provide investment advice
and no information or material on the Site is to be relied upon for
the purpose of making investment or other decisions. Accordingly, we
assume no responsibility or liability for a ny investment decisions
or advice, treatment, or services rendered by any investor or any
person or entity mentioned, featured on or linked to the Site.
The information on this Site is as of the date(s) indicated,
is not a complete description of any fund, and is subject to the
more complete disclosures and terms and conditions contained in a
particular fund's offering documents, which may be obtained directly
from the fund. Certain of the information, including investment
returns, valuations, fund targets and strategies, has been supplied
by the funds or their agents, and other third parties, and although
believed to be reliable, has not been independently verified and its
completeness and accuracy cannot be guaranteed. No warranty, express
or implied, representation or guarantee is made as to the accuracy,
validity, timeliness, completeness or suitability of this
information.
Any indices and other financial benchmarks
shown are provided for illustrative purposes only, are unmanaged,
reflect reinvestment of income and dividends and do not reflect the
impact of advisory fees. Investors cannot invest directly in an
index. Comparisons to indexes have limitations because indexes have
volatility and other material characteristics that may differ from a
particular hedge fund. For example, a hedge fund may typically hold
substantially fewer securities than are contained in an index.
Indices also may contain securities or types of securities that are
not comparable to those traded by a hedge fund. Therefore, a hedge
fund’s performance may differ substantially from the performance of
an index. Because of these differences, indexes should not be relied
upon as an accurate measure of comparison.
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