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Inside the Black Box: The Simple Truth About Quantitative Trading

Book Description

Inside The Black Box

The Simple Truth About Quantitative Trading

Rishi K Narang

Praise for

Inside the Black Box

"In Inside the Black Box: The Simple Truth About Quantitative Trading, Rishi Narang demystifies quantitative trading. His explanation and classification of alpha will enlighten even a seasoned veteran."

—Blair Hull, Founder, Hull Trading & Matlock Trading

"Rishi provides a comprehensive overview of quantitative investing that should prove useful both to those allocating money to quant strategies and those interested in becoming quants themselves. Rishi's experience as a well-respected quant fund of funds manager and his solid relationships with many practitioners provide ample useful material for his work."

—Peter Muller, Head of Process Driven Trading, Morgan Stanley

"A very readable book bringing much needed insight into a subject matter that is not often covered. Provides a framework and guidance that should be valuable to both existing investors and those looking to invest in this area for the first time. Many quants should also benefit from reading this book."

—Steve Evans, Managing Director of Quantitative Trading, Tudor Investment Corporation

"Without complex formulae, Narang, himself a leading practitioner, provides an insightful taxonomy of systematic trading strategies in liquid instruments and a framework for considering quantitative strategies within a portfolio. This guide enables an investor to cut through the hype and pretense of secrecy surrounding quantitative strategies."

—Ross Garon, Managing Director, Quantitative Strategies, S.A.C. Capital Advisors, L.P.

"Inside the Black Box is a comprehensive, yet easy read. Rishi Narang provides a simple framework for understanding quantitative money management and proves that it is not a black box but rather a glass box for those inside."

—Jean-Pierre Aguilar, former founder and CEO, Capital Fund Management

"This book is great for anyone who wants to understand quant trading, without digging in to the equations. It explains the subject in intuitive, economic terms."

—Steven Drobny, founder, Drobny Global Asset Management, and author, Inside the House of Money

"Rishi Narang does an excellent job demystifying how quants work, in an accessible and fun read. This book should occupy a key spot on anyone's bookshelf who is interested in understanding how this ever increasing part of the investment universe actually operates."

—Matthew S. Rothman, PhD, Global Head of Quantitative Equity Strategies Barclays Capital

"Inside the Black Box provides a comprehensive and intuitive introduction to "quant" strategies. It succinctly explains the building blocks of such strategies and how they fit together, while conveying the myriad possibilities and design details it takes to build a successful model driven investment strategy."

—Asriel Levin, PhD, Managing Member, Menta Capital, LLC  

Table of Contents

  1. Copyright
  2. Dedication
  3. Preface
  4. Acknowledgments
  5. The Quant Universe
    1. Why Does Quant Trading Matter?
      1. THE BENEFIT OF DEEP THOUGHT
      2. THE MEASUREMENT AND MISMEASUREMENT OF RISK
      3. DISCIPLINED IMPLEMENTATION
      4. SUMMARY
    2. An Introduction to Quantitative Trading
      1. WHAT IS A QUANT?
      2. WHAT IS THE TYPICAL STRUCTURE OF A QUANTITATIVE TRADING SYSTEM?
      3. SUMMARY
  6. Inside the Black Box
    1. Alpha Models: How Quants Make Money
      1. TYPES OF ALPHA MODELS: THEORY DRIVEN AND DATA DRIVEN
      2. THEORY-DRIVEN ALPHA MODELS
      3. DATA-DRIVEN ALPHA MODELS
      4. IMPLEMENTING THE STRATEGIES
      5. BLENDING ALPHA MODELS
      6. SUMMARY
    2. Risk Models
      1. LIMITING THE AMOUNT OF RISK
      2. LIMITING THE TYPES OF RISK
      3. SUMMARY
    3. Transaction Cost Models
      1. DEFINING TRANSACTION COSTS
      2. TYPES OF TRANSACTION COST MODELS
      3. SUMMARY
    4. Portfolio Construction Models
      1. RULE-BASED PORTFOLIO CONSTRUCTION MODELS
      2. PORTFOLIO OPTIMIZERS
      3. OUTPUT OF PORTFOLIO CONSTRUCTION MODELS
      4. HOW QUANTS CHOOSE A PORTFOLIO CONSTRUCTION MODEL
      5. SUMMARY
    5. Execution
      1. ORDER EXECUTION ALGORITHMS
      2. HIGH-FREQUENCY TRADING: BLURRING THE LINE BETWEEN ALPHA AND EXECUTION
      3. TRADING INFRASTRUCTURE
      4. SUMMARY
    6. Data
      1. THE IMPORTANCE OF DATA
      2. TYPES OF DATA
      3. SOURCES OF DATA
      4. CLEANING DATA
      5. STORING DATA
      6. SUMMARY
    7. Research
      1. BLUEPRINT FOR RESEARCH: THE SCIENTIFIC METHOD
      2. IDEA GENERATION
      3. TESTING
      4. SUMMARY
  7. A Practical Guide for Investors in Quantitative Strategies
    1. Risks Inherent to Quant Strategies
      1. MODEL RISK
      2. REGIME CHANGE RISK
      3. EXOGENOUS SHOCK RISK
      4. CONTAGION, OR COMMON INVESTOR, RISK
      5. HOW QUANTS MONITOR RISK
      6. SUMMARY
    2. Criticisms of Quant Trading: Setting the Record Straight
      1. TRADING IS AN ART, NOT A SCIENCE
      2. QUANTS CAUSE MORE MARKET VOLATILITY BY UNDERESTIMATING RISK
      3. QUANTS CANNOT HANDLE UNUSUAL EVENTS OR RAPID CHANGES IN MARKET CONDITIONS
      4. QUANTS ARE ALL THE SAME
      5. ONLY A FEW LARGE QUANTS CAN THRIVE IN THE LONG RUN
      6. QUANTS ARE GUILTY OF DATA MINING
      7. SUMMARY
    3. Evaluating Quants and Quant Strategies
      1. GATHERING INFORMATION
      2. EVALUATING A QUANTITATIVE TRADING STRATEGY
      3. EVALUATING THE ACUMEN OF QUANTITATIVE TRADERS
      4. THE EDGE
      5. EVALUATING INTEGRITY
      6. HOW QUANTS FIT INTO A PORTFOLIO
      7. SUMMARY
    4. Looking to the Future of Quant Trading
  8. Notes
  9. About the Author
  10. Index