“Fundamental” analysis and “quantitative” analysis used to be separate. Fundamental analysts read 10-Ks, built 3 statement models, and did channel checks, leading a to a final qualitative buy or sell decision. In contrast, quantitative analysts or “quants” built algorithms to scour mountains of market data for hidden signals on which to make ultra fast buy/sell decisions.
Typically firms specialized in either fundamental analysis or quantitative analysis, but not both. Larger multi-strategy firms might have both fundamental and quantitative strategies, but their analysts were likely to be siloed on separate floors. This made sense in a world where fundamental information was scattered and difficult to acquire.
But the world has changed.
We’ve moved from a world of information scarcity to a world of information overload. Analysts need to process alternative data sets such as social media posts, credit card data, foot traffic, satellite data in addition to financial statements and regulatory filings. Advanced data science tools are becoming vital in the quest for unique insights. In practice most data science uses basic statistical concepts, but the rapid increase in computing power has increased the volume and speed of analysis. Techniques that used to provide an investing edge have become commonplace.
Quantamental investing refers to the blending of quantitative and fundamental approach. Quantamental managers invest heavily in data in order to combine bottom-ups company analysis with quantitative approaches to alpha prediction. Several hedge funds known primarily for their fundamental analysis have hired data scientists. According to Bloomberg, Steve Cohen’s Point72 Asset Management, Dan Loeb’s Third Point, and Paul Tudor Jones Tudor Investment Corp have built out quantamental capabilities.
Remove Bias, Extract Signal From Noise
The best strategies combine cutting edge quantitative techniques with human business judgement. Combining big data, non-traditional information sources and fundamental security analysis amplifies predictive power. Fundamental analysis is important to better separate signal from noise, and to understand where to look for anomalies. Quantitative methods help remove emotion from qualitative decisions. The quantamental approach is more powerful than either quantitative or fundamental techniques used in isolation.
Options for Quantamental Investors
One area where quantamental analysis has been critical has been in the forecasting of earnings trends. This is evident by improvements in earnings forecasting techniques driven by crowdsourcing. This increased capability applies to every line of the income statement. Investors are now able to develop extremely granular insights into the drivers of value creation.
Its time for the investment products to catch up to these improved methods of analysis. Untangling individual value drivers into separate investment products creates myriad new ways to hedge risk and generate non-correlated returns. We designed Earnings Derivatives and BLX Global Indexes for this exact purpose.
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