Use And Advantages Of Quant Funds

Use And Advantages Of Quant Funds

Use And Advantages Of Quant Funds - Difference Between Quant Funds And Conventional FundsFor an investor who uses the mutual funds route to participate in the stock market, there are many categories available such as equity diversified funds, mid-cap funds, sector funds, index funds and quant funds.

The dictionary meaning of the word quant means analysis of data based on some computational models. Let us see how this is applied for mutual funds.

A mutual fund will have a portfolio manager and his team who will manage the allocation of funds mobilized. Depending on the fund category, they will take positions in stocks which fulfill the objectives of the fund.

The returns generated by the mutual fund will depend on a large extent on the expertise of the fund manager to take the right calls at the right time. This strategy is based on fundamental analysis and human judgment is critical here. Often it is observed that when a particular fund manager changes, the fund’s performance graph sees a sudden drop.

With the advances made in the world of computers and the widespread use of technology in the financial markets, computational models and algorithms came into picture which could guide trading strategies. These models use market data and financials such as P/E ratios, Earnings Per Share, profit margins, price movements, valuations and market trends to select stocks for investment.

Each fund house will be using a customized software solution based on such parameters to select the fund portfolio. Here instead of an active fund manager monitoring the fund, there will be a software solution based on quantitative analysis which does the job of a portfolio manager.

The advantages of this strategy are decreased possibility of wrong decisions due to human error and biased judgments. Also such models are very sensitive to trends in the market and can analyze huge volumes of data going back to a couple of years in a matter of jiffies.

It is very important that correct input data is provided for the quantitative model, otherwise the results will be unpredictable. The purists may sometimes view this strategy as a black box, since there is no transparency about why the model has picked up a particular stock. The expense ratio of quant funds will be marginally lower since a smaller team is required to manage the fund.

Now that we have seen how quant funds differ from conventional funds, let us see how they have been performing in the market. According to statistics, quant mutual funds have been giving an average 20% more returns than conventional equity funds. Of course this is largely based on the market performance and the economy as well.

Historically these models have worked well with large-cap stocks, so the portfolio of a quant fund is likely to be a subset of that of an index fund. Investing based on quantitative analysis is popular in the US and European markets. In the Indian markets, this trend is slowly picking up as fund houses are developing and fine tuning their quant models.

Quant funds may be used for portfolio diversification, investors may put 8 to 10% of their investment target in this category.

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