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Investment
June 2019 www.intellinews.com I Page 12
Quant funds keeping It simple and effective
Ben Aris in Berlin
“Quants Run Wall Street Now” used to be a common headline in the financial press, but the enthusiasm for high-powered number crunching has faded. Ed Thorp has been credited with being the godfather of quantitative investing. Thorp was the first to use probability theory and the law of large numbers to beat the financial market in 1960s, but a lot has changed since then.
Yesterday’s quantitative investing has become today’s algorithmic trading, which has become more and more complicated. International financial companies, the big banks and asset managers have become in a mathematical arms race. They invest into super powerful computers and poach the best mathematicians (quants), who develop sophisticated models in the hope of catching some market inefficiency or spotting a new and as yet unexploited correlation.
Obviously only the top global financial giants can afford to participate in this arms race – and even they are not always very good at it. ITI Funds, a Guernsey based portfolio company that is part
of the Da Vinci Private Equity Fund II, has taken
a different line: “keep your quantitative strategy simple.” So far the fund has put in a good track with an average annual rate-of-return above 50% over the last five years, which puts it on a par with the world’s best quant funds.
“We use a Keep It Simple principle because we think most other funds overcomplicate things,” says Julia Baranoskaya, the COO of ITI Funds. “It's the weak- ness of many algorithmic trading systems. The algorithms are too complicated and the system be-
comes non-transparent even to its own developers. It quickly becomes impossible to create a suitable risk management system. Everyone knows the sto- ries about the “flash crashes” when one of the bugs in the system sends its trading haywire. Developers tend to add more and more algorithms and more and more financial instruments to their strategies and the complexity increases exponentially. That is when they loose control over the trading system.”
Baranoskaya argues that instead of concentrating on intensively developing an algorithmic strategy, it is better to concentrate on one that not only works, but you can understand. It's the old argument
of “quality over quantity.” Better control over the trading system is more important than a system that tries to do everything.
“Unlike other people’s strategies ours is not backed by a risk-management system. It is based on it,” says Gelb Yakolev, CEO of ITI Funds.
The risk-management system has to be at the centre of the strategy, says Baranoskaya. That will reduce the returns somewhat, but it also reduces the losses.
“We watched other strategies operating and noticed they all gain profit slowly, day by day, and occasionally they gain a lot, but only to lose it all again the next day,” says Yakolev . “Our strategy is to collect those steady increases in profit but to limit the drops when then they come.”
The way risk is managed is to give each algorithm, or “bot,” its own strict limits. Limits are set for