1.4 Trading vs Investing

I have spent most of my working life trading
and creating strategies for trading groups.
At the beginning of my career, quant trading was dominated by arbitrage strategies that today we would consider quite slow and simplistic. Despite that, the strategies were quite profitable. Markets have become much faster and more efficient, and strategies have evolved to identify and exploit opportunities that are available for a few milliseconds and then disappear. The strategies that you will create don’t have to be perfect. Actually, perfect doesn’t exist in the trading world. They just need to be as good or better than the ones that your competitors will be using. First, we will discuss the differences between trading and investing. We will also identify the main strategy categories in the Quant Universe and then gain an understanding of how each component fits into a quant strategy. Lastly, we will point out the strong points and weak points of typical quant strategies. In this section, we will explore the design and implementation of quantitative strategies in trading. We will talk about the different parts of the Quant Universe and then explore the main types of quantitative trading strategies. First, let’s talk about trading versus investing. Financial sector firms are usually designated as either buy side or sell side.
Buy side refers to firms whose primary business is investing and advising. This group includes asset managers such as private equity, mutual funds, life insurance companies, pension funds, and quantitative trading firms such as hedge funds. Sell side refers to banks and broker dealers that sell investments and services to asset managers and hedge funds and that also provide market-making services. That means they act as dealers in secondary markets. At investment firms, we find portfolio managers make longer-term decisions about the strategic allocation of assets and somewhat shorter-term decisions about the tactical allocations. Strategic allocation decides how much to invest in each asset category such as equities, bonds, real estate, or commodities. （对资产的战略配置做了长期的决定，对策略性的配置做出了短期的决定）Tactical allocation chooses specific assets to buy or short within each category. (策略分配在每个类别中选择特定的资产买入或卖出). The most common investment strategy is to buy and hold assets that had been identified as undervalued based on fundamental analysis.（最常见的策略就是买入或者持有被低估的资产）

Portfolio managers’ gains and losses are measured relative to a relevant benchmark, portfolio, or index which mirrors their strategic allocation in their portfolio(配置的指数来衡量). This performance is measured net of any moves in the benchmark or index. So they can only outperform if their asset choices beat a passive portfolio that mirrors the benchmark（资产选择跑赢被动投资组合）. Hedge funds on the other hand, we find traders, developers, and researchers all working together to identify and implement quantitative strategies. Their goal is to generate a positive return （正收益）that is independent of overall moves in the market. This hedge return（对冲收益） is called Alpha. The term Alpha is also widely used by portfolio managers to refer to their outperformance or return above a benchmark. This excess return（超额回报） seems similar to the Alpha generated by hedge funds, but there’s an important difference. Portfolio manager Alpha comes from long asset holdings that are exposed to market, sector, and company risk as opposed to hedge fund Alpha which comes from a hedge strategy that has eliminated or at least attempted to minimize these risks（来自于已经消除或者最小化这些风险的对冲策略）. This is one of the key benefits of investing in a hedge strategy, especially if you’re worried there’ll be a sell off in the overall market.

Portfolio managers use fundamental analysis to rebalance the allocations in their portfolios. Rebalancing includes changes in the strategic allocation to give undervalued asset categories a heavier weight in the portfolio(使低估的资产类别在资产组合中有更高的权重). It can also include tactical reallocation, where ideally you’re selling winning assets that have achieved their full target value and replacing them with undervalued assets that have the potential to help the portfolio achieve returns in excess of its benchmark. At trading firms, traders have a much shorter-term opportunistic focus. The time frame for their investments ranges from a few months to a few milliseconds(几个月到几毫秒不等). A millisecond end of this spectrum dominates over all trading volume. Traders rarely use fundamental analysis as a factor in their decisions as they consider this information to already be baked in to the market price and essentially worthless for generating Alpha.（交易员很少将基本面分析作为决定因子，因为这些信息已经融入了市场价格，对Alpha毫无价值） Traders instead look constantly for market behaviors and inefficiencies that will generate high-risk adjusted returns on their trading capital. Although they trade the same assets as portfolio managers, they generally ignore fundamentals and focus on other sources of mispricing（通常忽略基本面，关注其他错误定价的来源）. Buy-side quantitative methods include regression, prediction models, statistical arbitrage（统计套利）, and machine learning which we’ll cover later in the course. Sell-side quantitative methods are mostly execution strategies. These are designed to reduce the market impact cost of large orders and also to capture spreads by providing liquidity through market making. Keep in mind though that buy-side firms also employ execution strategies when they execute their trading orders.

我工作的大部分时间都在交易和为贸易集团制定策略。在我职业生涯的初期，定量交易是由套利策略主导的，今天我们会认为这种策略非常缓慢和简单。尽管如此，这些策略还是很有利可图的。市场已经变得更快、更有效，策略也在不断发展，以识别和利用那些在几毫秒内就可以利用的机会，然后就消失了。你要创造的策略并不一定要完美。事实上，完美并不存在于贸易世界。它们只需要和你的竞争对手一样好或者更好。首先，我们将讨论交易与投资的区别。我们还将确定定量领域中的主要战略类别，然后了解每个组成部分如何融入定量战略。最后，指出典型定量策略的优缺点。在这一部分中，我们将探讨交易中量化策略的设计与实施。我们将讨论量子世界的不同部分，然后探讨定量交易策略的主要类型。首先，让我们谈谈交易与投资。金融部门的公司通常被指定为买方或卖方。买方是指以投资和咨询为主要业务的公司。这类基金包括资产管理公司，如私募股权基金、共同基金、人寿保险公司、养老基金和数量交易公司，如对冲基金。卖方是指向资产管理公司和对冲基金出售投资和服务并提供做市服务的银行和经纪交易商。这意味着它们充当二级市场的交易商。在投资公司，我们发现投资组合经理对资产的战略配置做出了长期的决定，而对策略性的配置则做出了一些短期的决定。战略分配决定了在股票、债券、房地产或大宗商品等每种资产类别上的投资额。战术分配在每个类别中选择特定的资产进行买入或做空。最常见的投资策略是购买并持有根据基本面分析被认定为低估的资产。

投资组合经理的收益和损失是相对于相关基准、投资组合或反映其投资组合中战略配置的指数来衡量的。这种表现是衡量基准或指数变动的净值。因此，只有在资产选择击败反映基准的被动投资组合的情况下，它们才能跑赢大盘。另一方面，我们发现交易员、开发商和研究人员都在合作，以确定和实施量化策略。他们的目标是创造一个独立于市场整体走势的正收益。这种对冲回报被称为Alpha。Alpha一词也被投资组合经理广泛使用，指他们的超常表现或高于基准的回报。这种超额回报似乎与对冲基金产生的α值相似，但有一个重要区别。投资组合经理Alpha来自于长期持有的资产，这些资产暴露于市场、行业和公司风险，而对冲基金Alpha来自于已经消除或至少试图最小化这些风险的对冲策略。如果你担心的是一个整体的避险策略的话，你会特别担心这个策略的好处。投资组合经理使用基本面分析来重新平衡投资组合中的配置。再平衡包括改变战略配置，使低估的资产类别在投资组合中占有更大的权重。它还可以包括战术性的重新分配，理想情况下，你出售的是已实现全部目标价值的赢家资产，并用有潜力帮助投资组合实现超过基准回报的低估资产来替代它们。在贸易公司，交易者只关注短期内的机会主义。他们投资的时间范围从几个月到几毫秒不等。这一范围的毫秒端支配着所有交易量。交易员很少将基本面分析作为他们决策的一个因素，因为他们认为这些信息已经融入市场价格中，对于产生阿尔法基本毫无价值。相反，交易者不断寻找市场行为和低效率，这将为他们的交易资本带来高风险调整后的回报。尽管他们与投资组合经理交易相同的资产，但他们通常忽略基本面，关注其他错误定价的来源。买方定量方法包括回归、预测模型、统计套利和机器学习，我们将在课程后面介绍这些方法。卖方定量方法主要是执行策略。这些都是为了减少对市场的影响.