Inside the Black Box: The Simple Truth About Quantitative Trading

12.2. EVALUATING A QUANTITATIVE TRADING STRATEGY

In my years of evaluating and creating quant trading strategies, I have noted an extraordinarily interesting fact: The work that a quant does is, in most ways, identical to the work that any portfolio manager, any CEO, or any other allocator of resources must perform. After all, these resources (e.g., time or money) are limited and must be invested in a way that results in maximum benefit. The process used to invest resources—the investment process—contains six major components:

1. Research and strategy development

2. Data sourcing, gathering, cleaning, and management

3. Investment selection and structuring

4. Portfolio construction

5. Execution

6. Risk management and monitoring

You may note that these activities are closely parallel to the modules of the black box and the activities in and around its construction and management. This is because all these areas must be addressed in order for a quant trading program to function properly over time. One fact about computers, which we've addressed already, is that they do not do a good job of thinking about things you might have missed. As quant trading programs have evolved over time, they have had to address the myriad decisions that any portfolio manager must address. Too often, in discretionary management activities, important aspects of this process are left without sufficient analysis, and an ad hoc approach is taken. I've interviewed scores of discretionary stock pickers who can spin tremendous yarns ...