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By Nicholas Vardy

Originally posted April 2, 2020 on Liberty Through Wealth

Editors Note: We know things are changing rapidly as the number of COVID-19 cases increases and Mr. Market reacts. Our strategists are here for you to keep you up to date with all the information that you need to make smart investment choices. Take a look at Nicholas Vardys latest video update here: How to Manage Financial Risks During Pandemic.

Christina Grieves, Senior Managing Editor

Machines are taking over Wall Street.

Today, the biggest quant investing firms, like Renaissance Technologies, Two Sigma Investments and D.E. Shaw, manage tens of billions of dollars.

In total, quant-focused hedge funds manage almost $1 trillion in assets.

The rise of quant investing has Wall Streets army of human financial analysts rightfully worried about their jobs.

Picture a room full of financial analysts spending their days (and nights) sifting through company balance sheets, income statements, news stories and regulatory filings. All this to unearth a yet undiscovered investment opportunity.

Compare that image with lightning-fast computers sifting through millions of patent databases, academic journals and social media posts every single day.

We humans dont have a prayer.

But thanks to the democratization of computing power, the rise of quant investing is terrific news for you, the small investor.

When I started my investment career in the 1990s, quant investing was about identifying momentum in stocks, riding trending prices like a surfer rides a wave.

I developed my first quant-based trading system in 1994 using a now-defunct computer program named Windows on Wall Street.

Today, cutting-edge quant hedge funds use computers and algorithms unimaginable two decades ago.

This kind of trading requires more the skills of astrophysics PhDs than those of traditional financial analysts.

Over the past decade, this quant-driven approach to trading has exploded. Thats partially because any edge stemming from fundamental research has all but disappeared.

Its said that in 1815, Nathan Mayer Rothschild used carrier pigeons to learn about the outcome of the Battle of Waterloo ahead of other investors. That edge made him a fortune.

George Soros attributed his early success investing in European companies in the 1960s to being a one-eyed king among the blind.

Today, financial traders have more information on their smartphones than the worlds top hedge funds did 20 years ago.

Being a one-eyed king just doesnt cut it anymore.

Trading is not the only arena in which humans have lost out to machines.

The battle between man and machine had a watershed moment in 1997. Thats when Garry Kasparov, the worlds top-ranked chess player at the time, lost to IBM supercomputer Deep Blue.

There have been many other such moments since. In 2013, IBMs Watson beat two Jeopardy champions. In 2017, Googles AlphaGo computer defeated the worlds top player in Go, humankinds most complicated board game.

In his book Deep Thinking: Where Machine Intelligence Ends and Human Creativity Begins, Kasparov concedes that human players have no chance against todays powerful computers.

The reason?

Computers follow the rules without fail. They can process vast swaths of information at the speed of light. They dont get tired. They are never off their game.

A human chess player has to screw up only once to lose a match.

The same applies to human decision making versus quant algorithms in the world of investing.

Fatigue, emotion and limited capacity to process information are all enemies to traders. In contrast, quant algorithms never tire, never get exasperated, and are immune to both a traders and Mr. Markets mood swings.

Thats why investing against machines is like playing chess against a computer.

Yes, you may beat the computer occasionally. But in the long term, its a losers game.

Quant investing may scare you.

It shouldnt.

As with all disruptive technologies, quant investing democratizes investing in unimaginable ways.

Twenty years ago, only the worlds top hedge funds had the computer power to generate consistent market-beating returns.

Today, I have access to computer programs that can develop similar quant strategies without the need for an army of PhDs. I can harness these computers to develop a wide range of quant strategies.

These strategies can unearth value, growth and high-quality companies They can focus on short-, medium- and long-term trading strategies They can identify technical factors like relative strength, momentum and reversion to the mean.

I have spent the last six months developing just such quant strategies. Specifically, I developed a short-term swing trading system.

Swing trading

Look for more information on my new trading service, Oxford Swing Trader, in the weeks ahead.

Good investing,

Nicholas

Stay informed with the latest news from Nicholas, including video updates where he shares his views on the current state of the markets. Simply like his Facebook page and follow @NickVardy on Twitter.

An accomplished investment advisor and widely recognized expert on quantitative investing, global investing and exchange-traded funds, Nicholas has been a regular commentator on CNN International and Fox Business Network. He has also been cited inTheWall Street Journal,Financial Times,Newsweek, Fox Business News, CBS, MarketWatch, Yahoo Finance and MSN Money Central. Nicholas holds a bachelors and a masters from Stanford University and a J.D. from Harvard Law School. Its no wonder his groundbreaking content is published regularly in the free daily e-letterLiberty Through Wealth.

Read more here:
Quant Investing: Welcome to the Revolution - Investment U