What is Quantitative Investing?
There are almost as many ways to define Quantitative Investing as there are investors who call themselves "quants". Almost the only thing that all Quantitative Investment strategies have in common is the desire to remove emotion from the investing process.
Constantia Capital's Small-Cap 130/30 strategy is managed using a quantitative implementation that falls into the category of "Factor Models". We use a proprietary model to rank equities based on various financial and technical factors, such as valuation, market sentiment, and earnings quality to construct risk-controlled portfolios which have a track record of strongly outperforming their respective benchmarks. Our model in its current form represents more than 18 years of research and enhancements so that today we can be confident that the model will produce positve alpha in different market environments. Just as important, in market environments where the model underperforms, our many years of research should help reduce the magnitude of any underperformance.
For any one factor concept, there are many different ways to define that factor. For example, PE ratios could be based on forward looking earnings estimates, backward looking earnings, gap earnings, cash flow etc. Our research has helped us come up with the best implementation for each factor concept included in the model and to discard other factor concepts which lack sufficient efficacy.
Quant models do not end at academic research. The underpinning of the model is logic and intuition. For example, in a valuation factor, we can understand why undervalued stocks should outperform expensive stocks.
Similarly, the transition from model to implementation is non-trivial, and to that end, Risk Controls are the most important consideration in portfolio construction. Each of our portfolios has an upper bound on tracking error, as well as limits on sector, industry and individual stock active weights. Furthermore, trading costs are an important consideration, especially for small-cap stocks, and we take that into account in the portfolio construction process.