Principles of Quantitative Equity Investing: A Complete Guide to Creating, Evaluating, and Implementing Trading Strategies

16. Why Does Quantitative Investing Work?

Now that you have learned all about quantitative investing, let me take a step back. The standard disclosure on most financial services products (including mutual funds and other investment advisory services) almost always includes the phrase “Past performance may not be indicative of future performance.” So why, then, do I promote an investing style, which by its very nature, relies on backtesting to validate ideas?

First, before detailing the case against quantitative investing, let me posit that backtesting is a small part of quantitative investing. As discussed in the section, “The Problem with Building Strategies Solely to Outperform in Backtests,” in Chapter 3, “Creating a Screen—The Nuts and Bolts ...