The article is about how to outperform the market, based on something so called "Liang Hua Tou Zi". I can't type Chinese now and I don't have enough time to translate it into Chinese. If someone want to do it, then please do it.
I am from the University of Queensland, Australia.

Outsmarting The Market                                    Business Week, January 22, 2007

BehindBarclay's quest to build a world-class team of academic quants thatsystematically does the impossible

It came as no great surprise that Richard G. Sloan took a leavefrom his tenured position at the University of Michigan's businessschool last summer to join an investment firm. Wall Street has stepped up itshiring of academics in recent years, and the 42-year-old Sloan is one ofaccounting's bona fide stars. But Sloan's explanation of why he left academiafor Barclays Global Investors (BGI) is startling. "I just felt that BGIwas getting ahead of me," he says. "I came here because this is wherethe leading edge in my area of research is now."

As one of more than 100 PhDs in BGI's employ, Sloan reinforces acadre of highly credentialed brainpower that no university finance or economicsdepartment in the land can match. San Francisco-based BGI is descended from afirm founded in the 1960s, but it has parlayed its prowess in the field of quantitativeinvesting into an astounding recent growth spurt. bgi has added $877 billion infunds since 2002, boosting its assets under management to $1.62 trillion andenthroning it above State Street ([url=]SST[/url]), Fidelity, and Vanguard as America'slargest money manager.

Barclays Global Investors' original claim to fame was inventing the index fund,so it is fitting that the bulk of the wealth this prototypical"quant" shop manages—nearly $1.1 trillion—is invested in vehiclesthat replicate the Standard & Poor's 500-Stock index and other indexes.However, Sloan and the other brainiacs that BGI continues to hire away fromelite institutions around the world are not preoccupied with devising clevernew ways to match market returns. Rather, they seek to do something that theefficient-market theories on which the firm was founded held to be impossible:to systematically beat the market.

HARD DATA VS. HEROICS
In its own quietly methodical fashion, BGI has indeed topped many indexes withremarkable consistency by overweighting its investment in certain of theircomponent securities—a conservative quant technique known as"tilting" or "enhancing." In fact, every one of BGI's 19principal stock market tilt strategies has outpaced its benchmark over periodsranging from 4 to 20 years. Add the gains produced by more aggressive vehiclessuch as hedge funds, and over the last five years BGI has generated a colossal$19.9 billion above the market return—or "alpha," in investmentparlance—for the 2,800 pension funds and other institutional investors that areits clients.

Long dismissed on Wall Street as a think tank that runs money on the side, thefirm and its eggheads have also engineered a tenfold rise in profits since2001. BGI, a subsidiary of British bank Barclays PLC ([url=]BCS[/url]), is likely to take in more than $1.6 billion in pretax profits this year,contributing to its parent company's much promoted allure as a takeover target.BGI, which began as the investment arm of Wells Fargo Bank ([url=]WFC[/url]), was acquired by Barclays in 1995 for $443 million—a great bargain, as it hasturned out.

"When we first started, we were a bunch of guys who stared at our shoes atcocktail parties," says Richard C. Grinold, a former Universityof California at Berkeley finance professor who is BGI'ssenior research guru. "But now the rest of the world has to react tous."

BGI's ascendance highlights the coming of age of quantitative investing, whichseeks to purge money management of human fallibility through the rigorousapplication of the scientific method. "The goal is to replace heroicpersonalities contending in an atmosphere of greed and fear with compellinghypotheses subjected to hard data," declared Grinold and longtimecolleague Ronald N. Kahn in a recent manifesto.

Fine, but how exactly does Barclays go about outsmarting the markets on such ascale? To find out, BusinessWeekinterviewed scores of BGI's alpha-seeking males and females, sat in on abrainstorming session of its Asian equities research group, and huddled with aportfolio manager on its trading desk as she put the firm's "portfoliooptimizer" smoothly through its high-tech paces.

This deep look into the workings of the planet's largest quant shop aboundswith informative lessons for the average investor. Unfortunately, though, theyadd up to this simple, humbling imperative: Get thee to an index fund.  Now.

You and I can no more hope to do what BGI does than we can torival such famously heroic stockpicking personalities as Warren Buffett andPeter Lynch. Quant investing BGI-style requires fluency in applied mathematicsas well as access to the prodigious computing power needed to continuouslycrunch the numbers for 10,000 stocks and 2,500 debt issues and executethousands of trades a day. With 2,640 employees spread among 11 offices aroundthe world, BGI is the largest quant manager by a wide margin.

Much ink has been spilled over the rapid growth of hedge funds and theirincreasingly aggressive alpha-seeking tactics. Meanwhile, a less publicized butequally telling shift is taking place at the opposite end of the risk-rewardspectrum, as the soaring popularity of exchange-traded funds (ETFs) breathesnew life into indexing, BGI's original forte. In the U.S. alone, ETF assets undermanagement topped $450 billion in 2006, up from $102 billion in 2002. BGIdominates the ETF business with a 60% market share, according to MorganStanley.

The explosive emergence of both risk-intensive hedge funds and risk-averse ETFscan be explained by a single concept that is transforming the big-money worldof institutional investing: alpha-beta separation. The basic idea is to lock ina market return (the beta part) on one end with low-cost index funds of onesort or another. On the other, pay up to put money into "alternativestrategies" run by managers with a proven ability to beat the market (thealpha part).

A recent study by McKinsey & Co. found that by the end of 2005,"higher alpha and cheap beta products" accounted for 50% of allinstitutional assets under management, double the figure in 2003. "Thewarning bells have already begun to toll for many traditional firms not willingto depart from their business-as-usual approach," McKinsey noted.Investment management consultant Casey, Quirk & Associates concurs,predicting that nearly half of the world's 50 largest money management firms"are not going to be around in their present form for much longer."

As the inventor of indexing, BGI has been separating alpha and beta since itsfounding. "The world has come BGI's way," says John F. Casey, CaseyQuirk's chairman and a longtime BGI champion. "I don't think a lot ofclients consciously decided that they wanted to shift to quants so much as theywanted to go with someone who knows exactly what risks they are taking and willdo what they say they will do. And that's BGI."

In traditional circles, quant has been derided as "black box" investingfor its reliance on computer models comprehensible only to the double-domes whocreated them. The black box survives today in the more mystifying form ofinvesting techniques derived from fuzzy logic, neural networks, Markov chains,and other nonlinear probability models.

As epitomized by BGI, though, modern quant investing is grounded in the sameeconomic fundamentals that preoccupy mainstream analysts, though quants amassmuch more data and massage it more systematically than anyone else does. Anotherkey difference is that quants ignore the story behind the numbers. The wholesprawling human drama of business is of no interest to Barclays researchers,who never venture out to call on a company or tour a store or a factory. If athing cannot be measured and factored into an investment hypothesis for testingagainst historical data, BGI has no use for it.

Quants also are far more mindful of risk, as measured mainly by pricevolatility. Traditional portfolio managers tend to heighten risk by concentratingtheir investments in a relative handful of companies that they believe willbeat the market averages over the long run. Instead of angling to get in earlyon the next Wal-Mart ([url=]WMT[/url] )or Microsoft ([url=]MSFT[/url]), BGI spreads its bets across a broad market swath, frequently trading in andout to exploit small pricing anomalies. The firm's $19.9 billion in alpharepresents just 1.64% above the market return, on average.

Quant is no investing panacea, however. Historically, its practitioners havefared better in periods when value trumps growth and have tended to flounder atthe fringes of the markets, where data tend to be spotty. Quant's by-the-book formalismand dependence on historical data also leave its devotees particularlyvulnerable to the manias and panics that disrupt markets at irregularintervals. The classic example is Long-Term Capital Management, a fixed-incomesuperstar that boasted two Nobel Prize winners on its board. Highly leveredLTCM imploded in 1998 under losses of $4.6 billion after the Russian governmentdefaulted on a bond issue, disrupting credit markets worldwide.

It was another catastrophe—the pricking of the tech bubble in 2000—that markedthe beginning of quant's rise. A trickle of new funds from safety-mindedinstitutional investors grew into a torrent as BGI, LSV Asset Managment,Enhanced Investment Technologies, AQR Capital Management, and other top quantfirms posted stellar returns in the buoyant, value-tilted markets of recentyears. Each of the three firms that sit atop the latest hedge-fund rankings isa quant master of long standing: Goldman Sachs ([url=]GS[/url]), Bridgewater Associates, and D.E. Shaw. (BGI ranks fifth, with $17 billion inhedge fund money.)

By contrast, the typical active money manager has struggled. Over the last fiveyears the s&p 500-stock index has outperformed 71% of large-cap funds, thes&p MidCap 400 has topped 83.6% of mid-cap funds, and the s&p SmallCap600 has bested 80.5% of small-cap funds, according to Standard & Poor's, aunit of The McGraw-Hill Companies ([url=]MHP[/url]), which also owns BusinessWeek.

STUDENT UNION CHIC
BGI goes to great lengths to limit its exposure to human error by usingcomputer technology to automate every investment process it can, includingtrading. And yet the ambiance at BGI's headquarters, in an office tower a blocksouth of Market Streetin downtown San Francisco,is much more coffee-stained grad school seminar room than antiseptic computerlab. For if the only investment ideas that count at BGI are those that can beexpressed in software code, they usually begin as a flash of insight in themind of someone like Xiaowei Li, one of BGI's 140 research officers.

Nov. 17, 2006, saw a milestone in Li's nascent career as an alpha hunter: herfirst presentation to BGI's Asia equitiesresearch group. The China-born Li brought impeccable credentials to the task,including degrees from Princeton University (a master's in economics and publicpolicy) and Stanford University (a PhD ineconomics).

Li is the leader of a project analyzing non-Japanese Asian banks. The object isto identify statistical factors—or "signals," in quant speak—to helpBGI determine which of the many banks traded in Hong Kong, South Korea,Indonesia, India, and other countries are undervalued in the stock market andwhich are overvalued. A signal highlights a market inefficiency; good ones arerare and often prove a juicy source of alpha.

Li, who had just returned from a swing through southeast Asia that includedstops in Hong Kong and Macao,began her presentation by passing around a list of 25 potential signals.Li'sideas were sketchily annotated, but that was to be expected at this earlystage. The meeting was just an inaugural brainstorming session, not a PhDthesis defense.

Gathered around a table in a small conference room on the 28th floor of BGIheadquarters were a half-dozen of Li's peers, plus her manager and the co-headsof the overall Asian research effort, Ernie Chow and Jonathan Howe, both ofwhom joined BGI in 1999 and were the fortysomething graybeards of the group.Everyone in the room had either a PhD or a master's degree in financialengineering. The disciplines represented included physics, applied mathematics,and operations research, as well as finance and economics.

Li stood throughout most of the two-hour meeting, the better to scrawl phrasesand formulas on the floor-to-ceiling whiteboard behind her. The discussion washighly technical and surprisingly lively. Who knew pre-provision operatingexpenses could be such a hoot? Chow and Howe took the lead in questioning Li,raising their voices only to talk over subordinates who on occasion were a bitovereager to comment.

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