What do quantitative traders really do?

Renaissance Technologies, one of the world’s most successful hedge funds, employs hundreds of physicists and mathematicians (it avoids MBAs and those with experience on Wall Street) to devise strategies to beat the markets. It uses what are called quantitative techniques. A quantitative approach tries to detect statistically significant patterns in price and time, converts those into trading rules (including an exit strategy) and puts them into a set of instructions for computers to follow mechanically. In its finest form, it approaches the markets in a spirit of scientific enquiry; most other approaches are based on impressionistic beliefs.

Quantitative trading, which started in a small way in the mid-1980s, has now become an important part of the capital markets. One of the important sub-sets of quantitative trading is high-frequency trading which involves making large limit-order bets over time periods as small as five minutes. Indeed, almost 40% of the trading done in the US markets today is contributed by quants.

But little is known about how actually quants function. What do they really do? They are hidden in ‘black boxes’. They hold the secrets to huge riches but they are also blamed for causing massive volatility. In this new book on quantitative trading strategies, Rishi Narang, founding principal of Telesis Capital, explains what exactly quants do. It answers questions like: what is quant trading; what are the secrets of successful quant trading; why did some quant traders go bust; did quants have a role in the recent credit crisis; and what is the future of this kind of trading.

The book is divided into three parts. The first provides a background on quant trading, the role it plays and its successes and failures. The second part addresses issues like how quants make money, the risk models they employ and their portfolio construction, execution and research. You get to know how hedge-fund strategies, like market neutral, long/short, statistical arbitrage and high-frequency trading, perform.

The third part addresses issues surrounding quant trading, including a separation of truths from myths, an exploration of the special risks inherent in quant trading, a manual on how to evaluate quant traders and their strategies, considerations regarding building a portfolio of quants and a look at the future of quant trading.
There are few books on quant trading and that is this book’s main value, especially since it totally eschews formulae and jargon and uses many anecdotes and real-life stories.