Inside the Black Box: The Simple Truth About Quantitative Trading

12.7. SUMMARY

To assess a quant trader and a quant strategy, one must understand the strategy being implemented and the quality and vigor of the process that generates strategies. To do this, the investor has three weapons at her disposal: building trust, gaining as much knowledge as possible about quant trading, and keeping information he learns as organized as possible. These tools can be used to extract and piece together information on a given quant, and on quant trading generally.

Ultimately, an investor has to determine whether a quant has an edge, what the sources of this edge are, how sustainable the edge is, and what could threaten it in the future. Edges come from people and/or processes, and it is in these areas that the evaluation of a quant must focus. Once quants have been vetted, they should be thoughtfully included in a portfolio. It is important to diversify across different approaches to alpha generation, different time horizons, and bet structures to complement best the other components of the investor's portfolio.

I remember once interviewing a senior employee at one of the best quant shops in the world. I asked him how on earth they had done so well, which of course was a sort of stupid question. His answer, however, was both concise and seemingly on target. To quote him, loosely: "There is no secret sauce. We are constantly working to improve every area of our strategy. Our data is constantly being improved, our execution models are constantly being improved, ...