Automation of money management has given a boost to the phenomenon of quant funds. In a quant fund, the investment decision or the stock selection is done as per predetermined rules based on a statistical or mathematical model. These funds depend on an automated programme to make decisions such as choosing investments and the timing of entry and exit. The quant fund manager, however, has a role in that he often designs and monitors the model that offers the portfolio choices. DSP Mutual Fund, in India, was open for subscription until June 3, 2019. Reliance Quant fund has been in the market for some years now. Apart from mutual funds, hedge fund managers also use quantitative models.
Importance of quant funds
The significance of quant funds is as described below:
- A pre-programmed model to select stocks eliminates the human bias and subjectivity that often trip human investors. For example, the model that DSP Quant Fund follows chooses stocks based on high return on equity and earnings growth consistency and potential, thereby eliminating highly leveraged and volatile companies. Using a pre-programmed model also allows consistency in strategy across market conditions.
- A quant fund follows a somewhat passive strategy, and its expenses are lower than active funds. As an instance, Reliance Quant fund (regular plan) has an expense ratio of 0.98 per cent, as figure lower than the 2–2.9 per cent the fund house charges on its other equity funds.
- Quant funds can have built-in checks on sector and stock concentration, something which passive funds that mirror the index do not have.
- Quant funds do away with certain situations such that one need not have to worry about the manager quitting, making mistakes, or going off the rails on the fund mandate. However, this does not guarantee that the fund would be a top performer.
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Drawbacks Some of the disadvantages of quant funds are as follows.
- Quant funds may be more suited for long-term investors as it may take time for the strategy to play out in full. So, it won’t benefit investors who want to take the initiative of the momentum or book profits on a regular basis.
- There is no easy way to earn high stock market returns. Quant funds use models that are tested based on historical data, which is not always a good indicator of the future. They do not guarantee benchmark-beating returns or higher returns than active funds. Moreover, if the holdings are rebalanced often, higher churn may push up costs and thereby result in less returns.
- The track record of these funds is not encouraging. Reliance Quant fund, for instance, has logged only 8 per cent return over the last five years and about 10.8 per cent over the last decade—lower than the average returns of large-cap funds in this period. It has also underperformed the benchmark—the BSE 200 TRI—over short and long time-frames. That said, however, each quant fund would need to be assessed on the workability of its own model.
A haircut, in the business context