With the recent market volatility, fund investments have tended to opt for robust and low-risk products in this market, and quantitative funds, which are both offensive and defensive, have entered the range of choices. Quantitative funds are always referred to as quantitative hedge funds, so what do quantitative and hedge mean respectively? What is a quantitative fund ?
With the continuous development of the securities market in recent years, the introduction of financial derivative products, the abundance of short-selling instruments, the increasing complexity of investments and the fundamental changes in investment strategies and profit models, there has been a corresponding change in the composition of investors in the securities market. The share of professional investment managers is growing and is accelerating. Among them, quantitative hedging strategies, which aim at absolute expected annualized returns, have become one of the main investment strategies for institutional investors due to their low risk and stable expected annualized returns.
The term "quantitative hedging" is actually a combination of the concepts of "quantitative" and "hedging".
By way of comparison and summary, Yale Wealth believes that the following statement is the most intuitive: "quantitative" investing is distinct from traditional "qualitative" investing. Quantitative investment uses statistical and mathematical methods and computers to find a variety of "high probability" strategies that can deliver excess expected annualized returns from large amounts of historical data, and disciplined quantitative models constructed from these strategies to guide investments in order to achieve stable, sustainable, above-average excess returns. It is essentially the quantitative practice of qualitative investing. It follows that all products that employ quantitative investment strategies (including ordinary public funds, hedge funds, etc.) can be included in the quantitative fund category. The most important feature of quantitative investing is the emphasis on discipline, i.e. the ability to overcome the influence of subjective investor emotions.
The concept of "hedging" was first introduced by Alfred W. Jones when he founded the first hedge fund in 1949, and he believed that "hedging" was about managing and reducing the systematic risk of a portfolio in response to changes in financial markets. Broadly speaking, hedge funds themselves are difficult to define and are generally defined as the use of financial derivatives such as futures and options and the associated long and short positions in different stocks to prevent or reduce risk and lock in profits.
Capital Asset Pricing Theory (CAPM) tells us that the expected annualized return on a portfolio is made up of two components.
The alpha expected annualized return is the expected annualized return of the portfolio over the market benchmark, and the beta expected annualized return is the expected annualized return of the portfolio from taking systematic market risk. Generally speaking, a good fund manager can achieve the alpha expected annualized return through stock selection and timing, but is not immune to the systematic risk associated with market declines. For example, in 2008, the SSE index fell by more than 60%, while the annualized expected return of products managed by good fund managers was around -30%. In this case, although they beat the market, they still lost money because the systematic risk of a market decline could not be effectively hedged. Yale Wealth Research believes that in combination with the domestic market, the single long form did have significant limitations in the past due to the lack of shorting instruments.
In contrast, hedging instruments can strip or reduce the systematic risk of a portfolio (beta expected annualized return) and capture pure alpha expected annualized returns, allowing the portfolio to capture positive expected annualized returns whether the market rises or falls, so hedge funds tend to seek absolute expected annualized returns rather than relative expected annualized returns.
