With the recent rise of index-enhanced products, the concept of quantitative stock selection has once again entered the eyes of investors. With the rapid development of quantitative investment in China in recent years, quantitative stock selection strategy has been widely used in the investment strategy of private equity products.

Definition of quantitative stock selection

Simply put, quantitative stock selection is to establish a model with quantitative methods, and then select a stock portfolio, hoping that the stock portfolio can obtain an investment method that exceeds the benchmark rate of return.

Why can quantitative stock selection make money?

Because the A-share market is not particularly efficient, in the inefficient market, the quantitative model can grasp and handle the micro-trading opportunities in the market far better than the human brain. Many irrational opportunities and arbitrage opportunities in the market need to be discovered through a large number of data statistics and mining.

On the other hand, quantitative stock selection strategy, because of its programmed operation, has the characteristics of discipline, objectivity, accuracy and timeliness, which can better grasp market opportunities and will not be affected by human emotional factors, and the discovery and execution of trading opportunities are faster than human judgment. Furthermore, quantitative stock selection is based on data mining and model stock selection, so the portfolio can hold hundreds of stocks at the same time, and can be traded at high frequency, which can well spread risks and improve returns.

What are the risk characteristics of quantitative stock selection?

First, the market-neutral strategy.

For the market-neutral strategy, the main goal is to choose a high alpha stock portfolio by quantifying stock selection and hedging stock index futures. In this way, the market risk of the stock portfolio can be stripped and the pure alpha income can be harvested. Therefore, in general, the neutral strategy is a relatively stable investment strategy, with less retracement risk and stable fluctuation, and the maximum retracement is smaller than that of pure bull products.

Second, the exponential enhancement strategy.

At present, the mainstream index enhancement strategy in the market is mainly evolved from the original market neutral strategy. In order to improve the efficiency of capital use and strive for higher returns, the hedging part of stock index futures in market neutral strategy is removed, and a pure long portfolio of stocks is directly constructed. Quantitative stock selection method is used to select a basket of stocks, track the index and control the tracking error. The purpose is to obtain the income higher than the market index under the premise of taking market risks, not only the pure alpha income provided by neutral strategy, but also the income brought by the market itself.

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