Man vs. Machine: Quantitative and Discretionary Equity Management
80 Pages Posted: 21 Dec 2020
Date Written: October 23, 2020
In modern asset markets, man and machine compete for profits. How does each fare? I build a learning model in which quantitative investors (reliant on computer models) have more learning capacity but less flexibility to adapt to market conditions than discretionary investors (reliant on human judgment). I use machine learning to categorize US active equity mutual funds as quantitative or discretionary. Consistent with the model's predictions, I find that quantitative funds hold more stocks, specialize in stock picking, and engage in more overcrowded trades. Discretionary funds hold lesser known stocks, switch between picking and timing and outperform in recessions.
Keywords: Investment Management, Quantitative Mutual Funds, Machine Learning, Rational Inattention
JEL Classification: G11, G23, G14
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