FTAdviser.com

Scrabble players will doubtless recognise quant as the long pole used by students to propel a punt through the leafy gardens of Oxford and Cambridge. 

Financial punters, on the other hand, are more likely to extrapolate quantitative. The abbreviation quant may draw a few raised eyebrows from the scrabble-playing contingent, but the financial meaning is much more widespread than its naval sister. 

Quant investors input historic company and market data into models, which then rank stocks from most to least attractive. They have two major advantages over qualitative approaches (which cannot, incidentally, be referred to as ‘qual’).

First, they are much less labour-intensive. US pension funds allocate vast sums to quant managers, along with trackers, because they don’t charge Savile Row prices for hand-tailored portfolios. 

Second, quant approaches can be back-tested. Number-crunchers can credibly demonstrate that their fund would have outperformed the index over the past 10 or 20 years. This is especially handy for financial whiz-kids who don’t yet have a track-record. It also lends itself to innovation - it’s no coincidence the first 130/30 funds used quant strategies. 

“Financial innovation - where has that got us?” I hear you scoffing. True, the numbers have turned around and crunched managers back over the past year. Risk control models based on past data have proved inadequate preparation for a new financial landscape. And most quant managers have a value bias, which hasn’t helped over the past 18 months, when growth stocks in energy and natural resources have been the pick of a bad crop. 

European consumers have always preferred to worship at the shrines of star managers than put their faith in computers, and the credit crisis has only confirmed their suspicions. But if the US market is really the picture of the UK market in 20 years time – and many believe it is – readers may have to buff up on quant. Who knows, one day it might even make it as a ‘proper’ word into the Scrabble dictionary.