If you did your homework on viable investment strategies, you’ve probably come across quantitative index strategies. While the quantitative index dates back to the 1980s, it took several decades for these strategies to become prevalent.
Quantitative investment strategies are a viable option if you want to diversify your portfolio, mitigate risks, and improve your decision-making. The question is, where do you start?
Below you can find everything you need to know about quantitative index strategies, including the pros and cons of using them to make investment decisions. First, let’s see what a quantitative index is.
What is a quantitative index?
Investing in stocks and options is always a risky endeavor. That’s why some investors are constantly looking for mathematical and statistical models to help them mitigate investment risks and make wiser investment decisions.
A quantitative index comes from a quantitative analysis rooted in mathematics and statistics. It shows you the value of a given financial asset, whether it’s an option or stock.
It tells you which stocks or options out of all you consider investing in have the highest probability of outperforming an index.
That brings us to quantitative index strategies, which stand for an approach to trading strategies based on a quantitative index. The goal is simple – enable investors to improve their investment
decision-making and help them increase their profitability.
How to calculate a quantitative index?
Before using any quantitative index strategy, you need to calculate the quantitative index for all the financial assets in your investment portfolio.
How do you excel at quant equity? How do you calculate the quantitative index, ensure its accuracy, and use it to structure an optimal portfolio?
The answer lies in data. Quantitative analysis implies using data to do your quantitative index calculations, identify patterns, and predict trends. We are not talking just about any data but historical quantitative data.
With new technologies such as Artificial Intelligence and Machine Learning, investors now have the opportunity to analyze enormous volumes of data. They can also enrich those data sets using historical records such as firmographic and headcount data.
Each prediction model that calculates these indexes is unique. They feature sophisticated algorithms capable of combing through data in minutes.
While tools specializing in quantitative analytics and index calculations may be unique, the outcome of the estimates depends on only one element – data.
For the analysis to be on point, the data set must be extensive enough and contain accurate, up-to-date information.
The most commonly used quantitative index strategies
Here are some of the most commonly used strategies based on quantitative index and analysis:
- Event-driven arbitrage – This strategy focuses on analyzing event data, and events can range from regulatory changes to various corporate actions.
- Quantitative value strategy – This strategy uses information about companies’ revenue, such as balance sheets and income statements, to rank quantitative equity.
- Risk parity funds – Using data can help you mitigate the offset losses in one asset by investing in another that is bound to provide gain in the future.
- Factor-investing strategies – These strategies produce scored stocks using factors that contributed to outperforming a benchmark index.
Advantages of quantitative index strategies
These strategies’ main advantages to investors are structure, discipline, consistency, and reliability. If you decide to use quantitative index strategies you will be able to use one method of analyzing developments in the market. It can help you stay disciplined and make coherent investment decisions.
We also have to address how incredibly fast it is to make decisions using these strategies. Whether you decide to use a couple of data inputs such as debt-to-equity ratio or thousands of historical inputs, your software and hardware will be able to process it really fast.
The method becomes very useful if you have to analyze a large group of investments at a time.
You can quickly tell the highly-rated investments from the others to decide which are worth investing in and which you should sell.
You’ve probably already guessed that quantitative index strategies are based on computer calculations. It makes them more cost-efficient than other investment strategies. You won’t have to work with costly portfolio managers or expert analysts.
Besides bringing discipline and consistency to your investment process, these strategies are easy to implement because the data is readily available. Even if you decide to enrich your database with historical data, you can quickly obtain it from data providers.
Disadvantages of quantitative index strategies
When it comes to the disadvantages of using data and computers to streamline investments, one, in particular, comes to mind.
Analytics software uses data to predict market movements. However, making a move and cashing in on market inefficiencies is not 100% risk-free as nothing in the world of options and stock trading is.
Even when using a data-driven approach, you are still exposed to certain risks.
For instance, if the market becomes volatile, the indexes can keep changing quickly, telling you to buy and sell stocks considerably faster than usual. Like you, this practice can incur high commissions and taxes.
You can understand quantitative index strategies quickly when you have access to the correct information. They refer to a data-based approach to investing that focuses on using analytics tools and predictive models while leveraging actionable historical data to identify patterns and trends.