Classifying the world of Quantitative Trading

Classifying an industry is something I enjoy doing. I want to see the macro picture. Me recently was introduced to the book: Inside the Black Box of Rishi Narang, which I highly recommend anyone interested in quantitative trading to get a hold on. This short blog is to sum up what I've learned.

1. Price

   a. Momentum

   b. Mean Reversion

   c. Technical Sentiment

2. Fundamentals

   a. Value

   b. Growth

   c. Quality

How do we fits companies into each category. CTA would be the 1a. Momentum one. Favourite assets are liquid one. Futures, forex, equities.

Long Term Capital Management are famous for the 1b. category. They did a lot of carry trade. Relative value trade, such as short the 30-year US treasury and buy the 29.5 year bond. It is similar to pair trading, stat arb. 

Market maker high frequency trading are in the 1c. category. They look at the order book and try to predict market psychology. They look at the volume of put option and call option relative to history. More put than normal implies something bad. 

Old Mutual Fund the hedge fund bit is classified as the 2.a. They use Factor model to find cheap stocks. One famous model is the Fama French model that claim market cap, price to earning, and book value (don't remember exactly) drive stock prices. These hedge funds normally trade equities. 

The Growth category includes those that look at the growth rate of company profit. And finally the Quality group look at one with low leverage. Or good management. Or no fraud risk etc. 

Conclusion is that pretty much everyone in the investing world claim to be "quantitative". But not all "quantitative" are equal. Some just use math to support trading decision. Some just use algorithm to execute a trade. A truly quant trading is some one who first look at a huge amount of data, do research on data to find alpha generating strategy. Then let the computer run the trades, with out much human intervention.

P/S: Here is how a quant should propose to his girlfriend: I'd like to be your put option picking you up when you fall down. Can you be my put option as well?