Quant investing is the future of financial markets
The most successful investor is one you've never heard of. "Jim Simons is arguably the most successful trader in the history of modern finance. Since 1988, Renaissance's flagship Medallion hedge fund has generated average annual returns of 66%. Warren Buffett, George Soros, Peter Lynch, Steve Cohen, and Ray Dalio all fall short." "Simons built a computer-based trading model. He doesn't rely on intuition of insider knowledge. In fact, he hardly new any financial terms as he was building an investment hedge fund. And yet, Simons built his company that would go on to revolutionize Wall Street. If you're like me, you've never heard of him. And that was the way he wanted it. In The Man Who Solved the Market, Gregory Zuckerman tells the story of Simons and Renaissance. " Up until recent decades, traditional, actively managed funds held an information advantage over rivals. That advantage has disappeared with the advent of computer-generated, algorithmic trading. Quant investors had emerged as the dominant players in the finance business. As of 2019, they represented close to a third of all stock-market trades, a share that had more than doubled since 2013.
Is this a good thing? Well that's a good question. Some would argue not:
Until now, markets have been driven by human behavior, reflecting the dominant roles played by traders and investors. If machine learning and other computer models become the most influential factors in markets, they may become less predictable and maybe even less stable, since human nature is roughly constant while the nature of this computerized trading can change rapidly.
Others would say that humans are prone to fear, greed, and outright panic, all of which tend to sow volatility in financial markets. Machines could make markets more stable. And computer-driven decision-making in other fields has generally led to fewer mistakes.
The fact remains that this is one of the hardest games we've invented. It's natural to attract the smartest of humans. But for all the unique data, computer firepower, special talent, the greatest investment firm to ever exist only profits on barely more than 50 percent of its trades, a sign of how challenging it is to try to beat the market -- and how foolish it is for most investors to try.
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