A cautionary tale for quants and systems traders

How would you feel if the average doctor was right 55% of the time? What if a "superstar" doctor, the one whose new patient waiting list stretched out for 1-2 years, was right 60-70% of the time?

That's how thing work in investing. A "good" quantitative factor, or system, is often acceptable if it has a 55% success rate. If you get a 65% success rate, you are a superstar. Some systems have success rates of less than 50%, but the average value of their wins dwarf the average value of their losses.

Finance quants are often said to suffer science envy. They employ scientific techniques to find alpha, but they do it in an environment where the signal-to-noise ratio is very low. Let`s not kid ourselves, we know what day traders, swing traders and system traders really do.

By contrast, the signal-to-noise in the sciences tend to be higher. Viewed in isolation, that can be a cautionary tale for all quant researchers and systems traders who think that they may have found their path to riches.

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