In November 2008, in the midst of the financial crisis, a hearing was held in the US House of Representatives, and five financial tycoons in suits were questioned by politicians respectfully.

All five are heads of top US hedge funds, from left to right: George Soros of Quantum, James Simons of the Renaissance, John Paulson of Paulson, Philip Falcone of Pioneer Capital and Ken Griffin of Castle Investment.

What the five men had in common was that they all made more than $1 billion during the financial crisis, but at the hearing, they had to rein in their edge and try to dispel accusations of "making money hard for the country." for example, Paulson stressed that his achievements were due to "hard work and detailed research," while Falco choked that he came from a poor working-class family and made so much money simply because he believed in the American dream.

Twelve years later, the five financial predators are still active in the front line of investment, but in this COVID-19 crisis, their performance has been clearly divided: Soros, Paulson and Falco have all suffered losses to varying degrees, but Simmons' flagship fund Medallion has returned as high as 29% this year, while Griffin's flagship fund Wellington has basically avoided the stock market crash.

Soros, Paulson and Falco are all good at active investment, while Simmons and Griffin are all engaged in quantitative investment, which is an important reason for their performance differentiation in a volatile market environment.

Different from active investment strategy, quantitative trading strategy (Quantitative Trading Strategies) does not rely on personal judgment, but uses complex mathematical models to predict the future price of investment targets. After more than 30 years of development, quantitative funds have gradually become the mainstream of the American investment market, and the top quantitative institutions have also formed their own distinctive characteristics.

The academic quantitative school represented by AQR publishes a large number of papers in cooperation with the academic circle, and specially sets up a library to share research results; the factor mining school represented by WorldQuant fully excavates useful factors from massive data; and the short-term technical school represented by Simmons' Medallion (Grand Medal) uses mathematical, physical and other scientific methods to establish quantitative models.

No matter which school, there are huge amounts of data, complex logic and mysterious models behind it, which makes quantitative investment seem unfathomable. In 2015, writer Michael Lewis (the original author of the movie "the Big short") wrote a book on high-frequency trading, "Flash Boy," which Hollywood said was too esoteric to make a movie.

At that hearing in 2008, Simmons and Griffin made headlines as representatives of quantitative investment and later withstood scrutiny by politicians in Washington. But another company that also plays an important role in quantitative investment, Barclays' Barclays Global Investors (BGI), is not so lucky.

BGI is the world's largest fund management company, also known as the stronghold of quantitative investment. BGI launched the first passive index fund product in 1971 and established the first active quantitative equity product six years later. Not only that, BGI is also the first company to apply the active quantitative model to the Asian market. As early as 2007, the Greater China team was set up to study A-shares with quantitative models.

However, despite BGI's outstanding performance in the 2008 financial crisis, it still failed to avoid the fate of being sold. Since Barclays still needs to invest a lot of money after its acquisition of Lehman Brothers (part of its business), BGI was sold to Blackrock (BlackRock) for $13.5 billion in June 2009 to meet regulatory requirements for tier one capital adequacy.[1]。

After the acquisition of BGI, many Chinese employees returned to work, which seemed to be some kind of butterfly effect-in 2009, when BGI was acquired, the story of quantitative investment in China officially began.

01. From the west to the east: the warm duck in the river is the first to feel the smell of spring.

As early as 2004, two quantitative funds have been set up in China: Everbright Prudential quantitative Core Fund and SSIC Morgan Alpha Fund. Chang Hao and Lu Jun, who are at the helm of the two funds, are also famous top investors in the industry in the future, but they still belong to the traditional value investment school from the point of view of their research ideas, prefer active investment, and are still in the self-groping stage for quantitative investment.

Coupled with the imperfect trading system and the lack of effective investment tools at that time, the real magic of quantification is difficult to perform. The market prefers active funds and is dismissive of quantitative funds with scattered investments and less fluctuation. in the following four years, there is no new quantitative fund issued in China. It was not until 2009, when a large number of people with overseas quantitative experience returned home, that the wave really began.

In 2009, Castrol quantified Alpha, China Shipping Quantification Strategy, Changsheng Quantification dividend Strategy, Fuguo Shanghai and Shenzhen 300 Enhancement and Chinese Business dynamic Alpha were established one after another.[5]. Among them, Li Xiaowei, former Director of active Equity Investment in Greater China at BGI[6]After returning to China, he joined Wells Fargo Fund and began to set up a quantitative team to apply the quantitative investment experience accumulated overseas to China's financial sector.

Different from active stock selection, the core of quantitative stock selection lies in the early model design. The design of the strategy can not rely solely on experience and intuition, need to use a large amount of historical data to build a model, and then through a variety of tests to verify the effectiveness of the model. Once the model is put into use, it must be strictly implemented to overcome human weaknesses and cognitive biases. No manual intervention shall be made until there are special circumstances.

The most widely used quantitative model is the multi-factor model. It separates the factors that affect the stock price (such as macro, industry, liquidity, corporate fundamentals, trading sentiment, etc.), and selects the effective factors through the statistical analysis of historical data. Buy stocks that meet these factors. In this way, we can avoid subjective blindness and quickly cover all stocks.

In March 2010, the Shanghai Stock Exchange and Shenzhen Stock Exchange launched a margin trading system. Half a month later, CICC launched the Shanghai and Shenzhen 300 stock index futures (IF), which marked the enlightenment of short selling mechanism and leveraged trading. Since then, China's stock market no longer has to rise to make a profit. Market decline can not only make money, but also derive a rich asset allocation strategy. This is a landmark moment for quantifying investment.

Like "Alpha (α)" in the fund name mentioned above is an important quantitative strategy. To put it simply, the return of any stock is equal to "α + β", β is the part that goes up and down with the market, and α is independent of market fluctuations, that is, a stock has risen, which may be due to the rise of the market (β), or because of the stock itself (α).

Alpha strategy, also known as market neutral strategy, is to hedge the market risk (β), regardless of whether the market rises well or not, leaving only the stock's own income. The specific approach can be done by long stock portfolio (α + β). At the same time, shorting stock index futures (- β) leaves absolute return α. Before there is no short selling tool such as stock index futures, the market neutral strategy is very difficult to achieve.

In 2012, Tian Hanqing and Li Haiwei, who once worked as fund managers at BGI, returned home and joined Huatai Berry and Jingshun Great Wall respectively to form quantitative teams. The investment directions of Li Xiaowei, Tian Hanqing and Li Haiwei, who have a BGI background, can basically include the quantitative strategies of public offering funds at that time.

The quantification strategy of public offering can be roughly divided into three categories: index enhancement (most of the stocks purchased basically copy the components of the index, by means of timing, stock selection, etc.), quantitative stock selection (selecting stocks through quantitative models, buying at the right time, pursuing excess returns that exceed the performance benchmark) and quantitative hedging (also called market neutrality, pursuing absolute return α).

When we see that public offering funds have learned a lot of overseas experience and developed vigorously, there are more reckless heroes hiding behind the scenes and quietly growing.

02. The tide is coming: when the heroes compete in the sea

In the first few years of the launch of IF (stock index futures), there are countless legends in the market.

The quantitative model written by recent college graduates can earn 5000 times in three years; fund managers refuse to raise money abroad for fear of revealing their amazing performance; looking at the trend of the stock index 30 minutes before the opening of trading, they buy and sell when they go up, and the profit is still considerable. Such a simple strategy of chasing up and down can run rampant, essentially in the belief that rising and falling prices are sustainable, which has been summed up as a momentum strategy overseas.

However, quantization has just started in China, and most people do not know how to use it, which brings opportunities to people who really know how to do it.

In 2011, Ren Sihong, who had worked in a top overseas quantitative institution, left CICC to create gold technetium assets; in 2012, Wang Chen, who graduated from Tsinghua University, returned from the Millennium Fund on Wall Street and founded Jiukun Investment; in 2013, Xu Xiaobo, who graduated from the physics department of Peking University, returned home from the American Castle Group mentioned at the beginning of this article and founded Ruitian Investment.

In 2014, Cai Meijie, deputy general manager of the sales and Trading Department of CICC, started a business and established Lingjun Investment. in the same year, Qiu Huiming of Wall Street returned home and founded Mingyi Investment. in 2015, three students from the computer Department of Zhejiang University, including Xu Jin, turned from IT to quantitative investment and established Magic Square Quantification (nine chapters of assets). These companies have become all-powerful private equity companies, with a peak size of more than 10 billion yuan.

From this, we can see that most of the top quantitative private placement can be divided into two categories, one is the local quantification born from universities such as Peking University, Tsinghua University and Zhejiang University, and the other is the quantification of returnees with overseas investment experience.

As the regulation of private equity is relatively loose and the organizational structure is simple, the trading strategy is more flexible, the investment is more hidden, and the risk is generally higher. Unlike public offering quantification, which pays more attention to fundamental data, private placement quantification pays more attention to quantity and price, that is, the technical aspect, and the turnover cycle is also shortened from once a month to a few days.

For example, with the same index enhancement strategy, private placement may only use the index as a benchmark, and the actual trading target is far more than index stocks; with the same quantitative stock selection, private placement pays more attention to high-frequency strategies and exposes more risks. use high turnover rate to control exposure risk[8]。

In addition to the main quantitative strategies of public offering funds mentioned above, the quantitative strategies of private placement are more abundant, including futures strategy, option strategy, bond strategy and other strategies.

Futures strategy is also known as CTA (managed futures) strategy, and its investment scope includes stock index futures, commodity futures and treasury bond futures. The most classic approach is to capture the trend of price momentum and to "catch up and kill losses" through rapid stop-loss.

There is also a more classic arbitrage quantitative strategy, through cross-market, cross-term, cross-variety to capture the unreasonable price difference in the market. For example, soybeans and corn from domestic trading houses can carry out cross-market arbitrage with agricultural products of the Chicago Futures Exchange; soybean oil, palm oil and rapeseed oil are substitutes for each other, and there may be room for cross-variety arbitrage due to the influence of seasonal climate; changes in the price strength of the same variety in different months can bring cross-term arbitrage.

There is still a big difference between volume-price strategy and fundamental strategy. As A shares are still mainly retail trading, the volume and price strategy of private placement can capture the irrational behavior of retail investors, and the reverse operation can earn excess returns. In recent years, it has been highly sought after by the market, and the competition has become increasingly fierce. In order to dig out the excess returns, we can only use more high-frequency data. However, in the same market environment, the higher the turnover rate, the smaller the strategic capital capacity.

Therefore, the quantification of private placement has also entered a bottleneck period. In the past two years, a number of private equity companies have directly suspended the purchase and addition of all products.[9]There are also those who control the scale by raising management fees[10]There are also products that sell dog meat with sheep's head, showing some amazing performance to the public, but investors can only apply for products with ordinary performance.

If the volume-price strategy focuses on trading behavior, then fundamental quantification pays more attention to the investment target itself. As far as stocks are concerned, fundamental quantification is to depict a panoramic picture of a listed company with numbers, condensing the characteristics of the company into factors, and combining the data to form an overall description of the company. Fundamental quantification can not care about the gains and losses of one city, one pool, because behind the support of economic principles, we can see farther, and the market capacity is also larger.

Investment is a risk, while quantification is a scientific risk. Compared with the risk of identifying people when selecting active funds, quantitative investment can use a more scientific and rigorous model to ensure that the investment style does not drift and avoid misoperation caused by subjective mood fluctuations. However, before quantification becomes a truly mainstream way of investment, there are still many tests ahead.

03. Look at today: there is another village around the corner.

When the quantitative strategy rushed in the three directions of more data, more accurate models and faster speed, it encountered a lot of waves and cleaned up a large number of funds for the industry.

The Alpha Black Swan incident at the end of 2014. Since 2013, although the overall market has not risen much, small-cap stocks represented by gem take off. Quantitative funds can get 54% annualized return as long as they are long gem and short IF hedges.[11]. However, at the end of November 2014, after the central bank announced an interest rate cut, the stock market soared into the sky, and small-cap stocks rose far less than large-cap stocks, resulting in the withdrawal of more than 15% of the alpha strategy products more than 1. 4%, and many products were forced to be wound up.[12]。

The stock market crash broke out in mid-2015. Since the middle and late June, the stock index futures have fallen into a whirlpool of public opinion due to the stock market disaster. In order to curb excessive speculation and strengthen the supervision of abnormal trading, regulators have gradually increased their control over stock index futures since August, making five adjustments in a month to increase transaction costs and reduce leverage, and the daily opening has never been limited to 10 hands. the proportion of closing fees is more than 100 times higher than that before the stock market crash.[13]。

At the end of 2016, the market style changed from stocks with high valuations and small market capitalization to companies with solid fundamentals and stable performance. Some quantitative funds that give too much weight to the growth factor and small market capitalization factor have come to an end, and the scale of more than 10 billion quantitative funds has shrunk by nearly 60% in a year.

In the post-stock crash period, due to the lack of effective short selling tools, stock index futures prices could not effectively reflect the market situation, quantitative hedging strategy funds were impacted to suspend opening, CTA strategy and quantitative stock selection competition became more and more fierce, difficult to recover the courage of the past, coupled with events such as the failure of small market capitalization factors, the quantitative funds covered with a mysterious veil were pulled down the altar, and there were not a few large withdrawals and thorough liquidation.

But it is in this difficult time that funds that can thrive after baptism can really be recognized by the market, and a number of new stars are rising. For example, the academic research of Everbright Baode Xin Jin Yi, "fixed income +" Haifutong du Xiaohai, and so on.

The period from 2016 to 2017 is called the quantitative year.[14]But in the past two years, a quantitative fund has won the crown of the Taurus Award open-end stock continuous winning fund, which is known as the Oscar of the fund industry in the industry. Jin Xianyi, who is at the helm of this quantitative fund, highly values the academic atmosphere of foreign academic quantitative representative AQR, so after joining Everbright Prudential, Jin Xianyi requires team members to complete an academic paper every year.

In 2018, the market was in the doldrums, the Shanghai Composite Index fell 25% for the whole year, and the active stock selection fund was almost wiped out. Quantitative fund index enhancement and quantitative stock selection is not much better, only the market neutral strategy because of the stripping of the market (β) risk, outstandingly. No matter how the market performs, it can actually make money for investors, which is also the original intention of Jin Xianyi to do a market-neutral strategy.

From the perspective of overseas quantitative development, the more mature the market is, the more difficult it is to mine α factors, so it is more necessary to use the scientific and rigorous attitude of academic research to constantly look for new factors. It is based on this academic attitude that Jin Xianyi is able to comply with the trend, not afraid of the wind and waves, and continue to earn excess income. Everbright Prudential launched the first quantitative fund in China in 2004, and now it has returned to the front line to compete for the quantitative throne.

Although the era of crazy quick money has passed, quantification of this treasure land has attracted more and more Internet technology companies, giants such as Baidu, Inc., and foreign investors such as Microsoft Corp are not willing to lag behind. Flush and other stock software is even closer to the stage and the moon, one after another joined hands with fund companies to launch big data quantitative fund, all sides cross the sea to show their magic.

The original multi-factor model contains financial and other fundamental data and technical data such as volume and price, and all the digital data in future search and social life may be included in the quantitative model. with the gradual liberalization of stock index futures and the official listing of stock index options, the new era of quantification in China is slowly opening.

04. Heaven and earth are vast: cloud sails are hung high and march forward bravely in the sea

In 1970, quantitative investment accounted for zero of all overseas investment. By 2009, quantitative investment accounted for more than 30% of all investment in the United States.[16]. In the global bear market in 2018, more than half of the 20 most profitable hedge funds were quantitative funds.[17]. It took decades for the United States to move from behind the scenes to the front of the stage.

China's quantitative investment has just passed the stumbling start stage, enlightening the elite returnees, developing the recklessness from the rivers and lakes, and standardizing the regulatory intervention. Ordinary investors' understanding of quantitative investment is still quite vague. Unfathomable words such as artificial intelligence, convolution nerve and machine learning are intertwined with those profiteering legends to form a demonized stereotype of quantitative investment.

In fact, the overall scale of quantitative investment in China is still quite limited, accounting for less than 5% of all active quantitative funds or funds with the word "quantitative" in their names. The impact of quantitative investment on the whole market is still very low. Compared with mature markets, quantitative investment is still a vast world in China and will make great achievements.

For A-shares in the historical process of de-retail and institutionalization, quantitative investment can find investment opportunities more quickly, play the role of market lubricant, provide sufficient liquidity and stabilize market fluctuations. In the future, with the gradual improvement of financial derivatives such as futures index and options, quantitative strategies such as fundamental multi-factor, statistical arbitrage, high-frequency trading and CTA will be further popularized in China's capital market.

Behind an effective quantitative model is the achievements accumulated by a team for years and decades. for ordinary people, it is almost impossible to build their own quantitative model. If you want to seize the development trend of quantitative investment in the future, it is the right way to choose a team that understands research, has achievements and is really reliable.

Judging from the process of overseas development, there is not much time left to earn alpha income by scientific means in the Chinese market in the future. It is an interesting and effective choice for investors to use a scientific adventure to achieve wealth growth.