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First Monkeys, Now Computers Pick Stocks Better

NYTimes did a brief piece [3] today about computer models making investment decisions and how these mutual funds, called quant funds (short for quantitative) are gaining in popularity and beating the market. First it was a bunch of monkeys with darts and now it’s computers!

A study published last year in The Financial Review found that enhanced index funds that use quantitative techniques outperformed their benchmarks, on average, from 1981 to 2000.

It’s not terribly surprising though because with the computational power and the vast wealth of quantitative data available, a computer could clean house but the article does a good job of shining a bright light on the good and the bad. The good is that the mutual fund’s decisions are made with a large amount of information, more than what an analyst can get, but there are a lot of bad things too. Quant fund models wanted to buy Merck in 2004 during the Vioxx issue, humans intervened, and they typically trade more often so the fees will likely be higher.

Would you trust a computer model to trade for you?