Xin Feng, Co-founder of Wizard Quant, was invited to deliver a keynote speech titled “AI has Arrived, Embracing the Next Era of Quantitative Investment” at the “Smart Data·Smart Way – Data Intelligence Forum” during the 2023 World Artificial Intelligence Conference (WAIC) in Shanghai China.
“The overly expansive approach to AI development isn’t recommended, as overtaking on a bend requires sufficient foresight. Only with patience and long-term persistence that we can truly harvest the benefits of this age.”
“In terms of quantitative investment, let’s avoid extreme praise or criticism. We eagerly anticipate the joint progression of the quantitative industry, just as spring isn’t signaled by a single blooming branch, but by a garden full of blossoms.”
The following is a summary of Mr. Feng ‘s speech at this forum:
Quantitative investment contributes to promoting high-quality development of the market
Index Enhancement
In China’s quantitative investment, a large portion of managed assets falls under the category of index enhanced strategies. While the concept was not initially introduced by quantitative trading, it has indeed consistently yielded relatively sustainable excess returns over various market cycles.
The quantitative investment sector is thriving, attracting long-term net capital inflows and spurring individuals to engage more in equity markets. This engagement mitigates the effects of short-term market volatility on investor confidence. Moreover, the sustainable above-average returns promote a long-term investment perspective.
Liquidity
Quantitative investment enhances market liquidity, fostering optimal operation of the equity market.
Liquidity may seem like a familiar concept, with many often believing a stock’s market capitalization is determined by “stock price ×shares outstanding”. However, the true realizable market capitalization is more accurately calculated as “interval average stock price × liquidity recognized at that price within the interval”. Only when there is ample liquidity recognized at current price can there be sufficient market capitalization.
In the secondary equity market, ample liquidity benefits both entry and exit processes, contributing to stabilized stock prices. Primary market investors, who also require an exit in the secondary market, can be assured by ample liquidity and stable realizable market capitalization. This confidence bolsters primary market investments and enhances the equity market’s ability to meet the financing needs of businesses.
Liquidity is not determined solely by trading volume but also involves effective ‘pricing’. Quantitative investing plays a key role in establishing this efficient pricing.
High-quality Pricing
It is generally believed that high-quality pricing contributes to the survival of the fittest in the stock market. However, often overlooked is another aspect that quantitative investment can establish and leverage the extensive correlations among stocks, effectively creating a cohesive and interconnected whole that shares liquidity and absorbs market impacts.
In the language of machine learning, stocks can be embedded from a sparse one-hot encoding space into a dense space, a process known as embedding. By utilizing attention mechanisms, we can delve into the relationships amongst stocks and transform these into coordinates within this dense space. This is the core idea behind Graph Attention Networks (GAT) and forms the foundation for recent successful large-scale language models.
With the introduction of this mechanism, we can weave individual stocks into a network where information flows. While individual stocks may be vulnerable, each node in this network is strengthened, and the pressure on a particular stock is distributed throughout the network. As a result, the entire market shares liquidity.
In such a network, when trading a stock, its liquidity can come from related stocks. This enables liquidity transmission and substitution, significantly reducing the trading impact cost and ensuring a stable and substantial market value for stocks in the secondary market.
Quantitative Investment is the Intersection of Technology and Finance
The Technological Spillover of Quantitative Investment
As quantitative managers become more proficient, quantitative investment companies are emerging a formidable force in technology.
The inherent technology-driven nature of quantitative investment firms determines our ongoing commitment to technology. Some quantitative managers are actively investing in technology, while others are driven by competition, but the results clearly show that technological investment is necessary and significantly contributes to the development of the firm’s core business. Without continuous and effective investment in technology, it is challenging to achieve meaningful updates and iterations.
In parallel, the unique cash flow structure of quantitative investment companies, unlike traditional tech firms, facilitates enduring technology investments. Moreover, these firms excel in result-oriented research and development. Additionally, the abundant talent pool and strong recruitment capabilities further underscore their commitment to technological advancement.
Wizard Quant’s AI Practice: An Organic Integration of Statistical Learning and Machine Learning
It’s important to note that an overly extensive approach to AI development is not advisable, such as excessive focus on short-term trends and engaging in repetitive work lacking innovation. Keeping pace with and learning from others is an essential part of development, but overtaking on the curve requires a sufficient level of foresight rather than mindlessly replicating.
Apart from concentrating on AI technology application, we should also consider how AI can contribute to societal development, with an emphasis on AI ethics, safety, and inclusivity. Trend-chasing might signal the dawn of the AI era, yet it’s through patience and long-term persistence that we can truly harvest the benefits of this age.
Quantitative investment holds a substantial technological attribute as it elevates our core competitiveness in a highly efficient market. This enables us to respond to challenges more confidently and contribute to national strategies as the entire financial market progressively opens up.
Presently, Wizard Quant’s practice in AI wholly encapsulates the fusion of statistical learning and machine learning. Over the past decade of exploration, we have gradually accumulated experience in areas like model interpretability and addressing overfitting, finding appropriate solutions that fit our needs.
A standout characteristic of quantitative investment and the investment field at large, is rapid feedback. In the “real money” financial market, it’s vital to incrementally expand our knowledge boundaries from familiar domains, diligently building a solid foundation. It’s imperative to aim for a comprehensive understanding, not just knowing the facts but also grasping the underlying principles.
Expectations and Prospects of Quantitative Investment
Being fortunate to be part of the industry wave, Wizard Quant adheres to a consistent philosophy:
Firstly, adhere to long-term thinking. It is essential to have a long-term perspective, build trust with investors over the long run, maintain frequent communication, including effective communication with the regulators. In terms of quantitative investment, we neither wish to deify nor demonize it.
Secondly, size is not the sole consideration. Blindly pursuing asset under management (AUM) should not be the goal, instead, the assessment of capabilities is of greater importance. In the asset management industry, whether it’s public or private, macro or quantitative, there should be a more scientific evaluation system, with the ability as the criterion for judgment.
Finally, we’re enthusiastic about contributing to the collective growth of the quantitative industry. Learning from the wise, catching up with enthusiasm. We eagerly anticipate the joint progression of the quantitative industry, just as spring isn’t signaled by a single blooming branch, but by a garden full of blossoms.
Let’s keep up the good work!
