Quantitative Investing and Market Instability

Do machines beat humans? Evidence from mutual fund performance persistence

“…Abis (2020) proposes an equilibrium model that predicts that quantitative funds focus on stock picking, hold more stocks and display procyclical performance, while non-quantitative funds do both stock picking and market timing and focus on stocks with less available information. Beggs, Brogaard, and Hill-Kleespie (2021) show that quantitative investing may result in a more unstable market because quantitative fund fire sales have a much larger impact on market instability than fire sales by traditional mutual funds. The literature also finds that quantitative funds charge lower fees than their non-quantitative peers (e.g., Ahmed and Nanda, 2005;Zhao, 2006;and Abis, 2020).…”

“…However, quantitative strategies are often based on the premise that historical relations among investment factors persist over time and follow flexible strategies (Khandani andLo, 2011, andAbis, 2020), which is not consistent with the increasing uncertainty observed in financial markets. Also, quantitative trading is vulnerable to overcrowding, as there are too many computer programs trained to exploit too few market anomalies (Abis, 2020, andBeggs, Brogaard, andHill-Kleespie, 2021). Das (2019) argues that "While models create an illusion of sophisticated certainty, they can't capture the full range of events that produced a particular outcome and could perform poorly where a paradigm shifts occur.…”

Diseconomies of Scale in Quantitative and Fundamental Investment Styles

“…Finally, Beggs, Brograard, and Hill-Kleespie (2021) examine how variation in quantitative investing relates to market stability over time. They follow Abis (2020) in classifying mutual funds as quantitative through a textual analysis of mutual fund prospectuses.…”

Research on the Development Status and Risk Management of Quantitative Investment- Based on Chinese Market

“…For the same magnitude fire sale, the impact of quantitative funds is over eight times as large. The larger impact is due to quantitative funds' reliance on similar trading strategies and their strategies' sensitivity to the time-series of returns [8].…”