What is Quantitative Portfolio Management?

Quantitative portfolio management occurs when an investor chooses the securities which comprise his portfolio based on statistical and numerical data. This data is then fed into models based on past performances and statistical probabilities to determine the best investment choices and the timing for buying and selling them. Analysts in charge of quantitative portfolio management, known as quants, also judge risk levels attached to every possible investment in contrast with the potential rewards. While quantitative analysis helps take psychological issues out of investment choices, it can be slow to react to sudden market shifts.

Making the right investment choices can make the difference between an individual with a sturdy portfolio providing financial stability well into the future and one with nothing to show for his investment capital. Many people like to make these choices based on past investment experiences, current events, or just their own gut feelings. Others believe in the power of statistical data and its ability to predict future outcomes out of past and current numbers. Those people would likely be the ones most in favor of quantitative portfolio management.

Whereas most quants might be concerned with picking one security over another at a specific time, quantitative portfolio management requires an assessment of the investor's overall financial picture. Once the analyst knows the investor's expected rate of return on his investment and his acceptable risk levels, he can then begin processing the data to achieve the necessary results. Quantitative analysts have the ability to statistically break down a portfolio and determine its strengths and weakness.

The advantage of using quantitative portfolio management is that it takes away some of the human tendency to second-guess sound decisions. By putting faith in proven statistical formulas, an investor may have a better chance of returning profits than if he tried to beat the market himself. While quantitative analysis isn't free from risk, analysts can point definitively to results achieved by different mathematical formulas and computer programs when touting the benefits of relying on the numbers.

Of course, the drawback to quantitative portfolio management is that it requires the investor to relinquish much of the control he might otherwise have over his capital. Relying strictly on the numbers is fine until the numbers suddenly shift. One of the main concerns with quantitative analysis is that it is sometimes slow to react to occasional sea changes in the market. By the time adjustments are made, an investor might have suffered significant damage to his portfolio.