Quantitative investing is a form of alternative investment strategy that aims to remove emotion and personal discretion of an individual from the investment selection and management process. It uses systematic mathematical processes to turn investing into a “science” thereby removing the behavioural biases that are inherent in human decision-making.
For example, individual investor may say, “I think this stock will go up because of a good (expected) earnings report next week, I’m going to buy now.”
A quantitative system will say, “there is a 60% probability of above average earning results next week and based on variables x, y and z, there is a 30% probability of an upward price movement of more than 5% given a positive earnings results but a 45% probability of a negative 5% price movement in case of a negative earnings result. Since this reward to risk probability is below our minimum defined threshold, do not buy the stock.”
Quantitative investing removes the “I think” from the process and instead utilizes a systematic process to identify mispriced securities and build efficient portfolios. Most successful quantitative managers attempt to uncover predictive signals from both readily available public data and proprietary information.