Inside the Black Box

Whether you call it quant, algo, or black box trading, it all adds up to the same thing: systematic trading performed by computers. While some decry it as dangerously detached from human control, and a driver of excessive volatility in the markets, others see quantitative trading as a welcome departure from the unruly passions and cognitive biases that inform human investment decision making. Say what you will about quant trading, the fact is, overall, quant funds consistently outperform the markets-which may be why so many smart investors are keen to avail themselves of that black box magic. Unfortunately, much remains obscure about quantitative trading, thanks in great part to the extreme guardedness of quants when it comes to the details of how their systems work. But, as quant-trader and master explainer Rishi Narang deftly shows in this updated edition of his bestselling guide, quantitative trading is much easier to understand and take advantage of than you think. Designed to make quantitative trading comprehensible to even the most math- or technophobic investor, this book takes you on a guided tour inside the black box. In plain English, Mr. Narang turns the lights up on what the quants are up to, once and for all lifting the veil of mystery surrounding quantitative trading and quantitative trading strategies. Following a concise introduction to quantitative trading principles and general practices, Mr. Narang cuts to the chase with a detailed inventory of the contents of a typical black box system, explaining, in non-technical terms, what each one is and how it fits together with the others. Then, with the help of numerous real-world examples and lively anecdotes, he clearly explains:* The most common quant system structures* How quants capture alpha* The level of discretion in quant trading* High-frequency trading and the infrastructure that supports it* Execution algorithms and how they work* How quants model risk and how to know if a particular model really works* The important difference between theory-driven systems vs. data-mining strategies* How to evaluate quant managers and their strategies* How quant strategies can fit into an overall portfolio strategy-and why they're so important* Current and future trends in quant trading and the role it will play in the years ahead A book that lifts the lid on black box trading, making it transparent, intuitively sensible, and readily understandable, Inside the Black Box is a must-read for institutional investors, asset managers, investment advisors, pension fund managers, and all savvy investors looking to gain an edge in today's turbulent financial markets.