Should you invest in quant funds?

Quantitative investing is picking a good pace not only in India but globally as well. Read on to find out whether it makes sense to invest in them.

Globally, quantitative investing is gathering good momentum. India is also not behind and we have seen around four quant fund launches in a matter of one year.

What makes it so trending? The following example will help you to comprehend the trend better. There is a fund that delivered more than 66% annualised return before fees and 39% after fees over a horizon of 30 years from 1988 to 2018. This is the Medallion Fund, managed by James Harris Simons, the founder of Renaissance Technologies, who has earned the name of being the best money manager on earth for delivering such a spectacular performance.

The said fund is currently open only to employees of Renaissance Technologies and a few other people connected to the firm. It is interesting to know that this firm uses mathematical and statistical methods in order to create and manage its portfolio. Here they apply computer models and algorithms along with other vast sets of data to predict future prices of a particular security. Moreover, it eliminates human error in security selection by keeping behavioural biases at bay which affect the performance of the fund in some or the other way. That said, one should never forget that these quant models are themselves designed by humans.

What are quant funds?

Quant funds are mutual fund schemes that adopt rule-based investing for short-listing and designing a portfolio of stocks. Such funds have a minimal role of a fund manager as they apply a number of pre-determined filters for picking stocks. Here the role of the fund manager is to review the model annually and tweak it, if necessary.

According to a study by Morningstar in 2015, 65% of the alpha comes from exposure to broad market factors such as value, momentum, yield, volatility, liquidity and size – these are primarily quantitative factors – whereas the remaining 35% comes from stock selection – fundamental analysis and human judgment. At present, there are five funds in India that operate on a quant model having collective assets under management (AUM) of Rs 3,035.2 crore as of February 2022.