In the past many times, whenever I have recommended a quantitative investment methodology (mainly quantitative options) to other groups, I have always promoted its advantages from a semi-scientific approach based on past retrospective results and thus a better winning rate. The biggest challenge with such a promotion is that there is always someone who thinks that good retrospective results are very likely to be over-hyped, and the model itself is not very credible in bringing the same super-return potential in the future.
The future performance of this so-called excellent investment manager is also quite likely to be very different from that of his past brilliant performance. Such examples are actually better than all others. If there is enough historical data, I am convinced that the statistics of the annual return ranking of the publicly traded fund in the second year will be very surprising. So I never think that a logical and well-reviewed stock model, especially if its review period is long enough, is less predictive of the future than a fund manager with a good investment performance in the past short period of time and who can tell many stories.
I think that in China, another very convincing and almost unrecognized selling point of quantitative investing is actually based on a much deeper, more logical reality. This reality is that the Chinese stock market is far more volatile than other countries. This generalizes what some people talk about as stiffness, short-term hot hype, policy markets, etc. If you agree with this view, then you realize that in such a market, if there is no scientifically regulated method of operation, you are very likely to be the casino that is being made by someone else.
The conclusion that China's stock market is highly competitive was recently backed up by data from Wei Ming, chairman of the private equity fund MinSung Investments. Wei Ming's conclusion is convincing because he has more than 20 years of experience investing in Chinese stock markets and has investigated over 500 listed companies. He recently spoke at a strategy meeting of the National Trust Securities Organization, saying that 80% of Chinese listed companies do nothing but destroy shareholder value. His conclusion can be supported by a very simple economic value added EVA (Economic Value Added).
So why is the Chinese stock market more competitive than other markets? This may be a sensitive topic, and everyone has their own opinion. Personally, I think that the stock market is a very regulated market economy. The biggest problem with the Chinese stock market is the conflict between the interests of the participants in the secondary market and the interests of the large shareholders of listed companies.
Few large shareholders operate a public company with the spirit of founding a century-old store, while betting all their wealth on the company together with other shareholders to achieve wealth growth. This conclusion does not exclude the existence of such an entrepreneur, but only points to this statistical conclusion. Large shareholders often influence the stock price through various capital games ((there is a better name in the industry called market value management), and secondary market participants who do not know this truth often become victims of this phenomenon. There is a term in the capital market called the tunnel effect.
Another major reason for the volatility of the Chinese stock market is the active participation of retailers, especially when some markets are trading. A recent Bloomberg article reported that two-thirds of the roughly 4.5 million new brokerage accounts opened in the first quarter of 2015 were held by people with a high school education or below. This highlights the popular mindset of following trends, chasing after quick money, and forgetting about the past.
Such a feature of the Chinese stock market also partially explains why long-term holdings of value stocks often leave investors unconvinced and unable to hold onto them. Using a quantitative retrospective approach, you will find in the past that any regulated investment method, a high-swap trader's trading method is better than a low-swap trader's long-term holding method, even after deducting transaction costs and shock costs. Since the Chinese stock market does not have a capital gains tax, this further contributes to the trading characteristics of the stock market and dilutes the investment characteristics.
Therefore, quantitative investing as a rule-based investment method should be a very convincing advantage in a highly volatile market like China. In the highly volatile futures market around the world, quantitative trading has long been the undisputed mainstream due to the trading characteristics of T+0 and excellent liquidity. Computers have an advantage over the human brain because they can quickly process large amounts of information and make rational decisions in a short time without interference from other factors.
Translated from Programmatic trading and quantitative investing