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Automation is taking over the world today. It has entered almost every field, including mutual funds!
Quants funds are a special kind of mutual funds whose asset allocation, including stock picking, is decided based on a predefined set of rules. Quants funds are dependent on an automated system to make decisions pertaining to the portfolio, and the fund manager will not have any say in this. The entry and exit times are also decided by the automated program, unlike the actively managed funds. However, quant funds, unlike index funds, are not entirely free from a fund manager.
The fund managers are tasked with monitoring and designing the model which picks the portfolio options. Nippon (Reliance) and DSP are the only Indian fund houses to offer quant funds. Aside from mutual funds, some hedge fund managers also make use of quantitative models to design their portfolio.
The most significant benefit of using a predefined quantitative model to pick stocks is that it removes the human interference, thereby the possibility of bias in stock picking.
For example, if a fund house uses a model to select stocks based on the track record of providing high returns and growth potential, it eliminates picking stocks of those companies that are profoundly leveraged and volatile. Also, making use of a quantitative model will provide consistency in framing strategies in all market conditions. At times when a bearish trend grips the markets, the managers of actively managed funds are often forced to exit holding certain stocks and change their style of investment. As quant funds are managed in a passive manner, the expenses are lower than the regular actively managed funds. The models governing the quant funds have inbuilt checks on the stock concentration and sectors.
A major advantage of investing in quant funds is that you don’t have to bother about the fund manager leaving, committing mistakes, or deviating from the objective of the fund. Nevertheless, the elimination of human bias is not guaranteeing the fund to perform exceedingly well. This is because quant funds are modelled based on past performance which is never an indicator of future performance. Therefore, benchmark beating returns are also not assured in the case of quant funds.
Quant funds are suitable for investors that are going to stay invested for a long-term. This is because the strategy planned out may take some time to reap benefits to the fullest. Therefore, investors looking to book profits when the markets are favourable may stay away from quant funds.
If you are thinking of quant funds as an easy manner to earn high returns, then you may be headed for a disappointment as they don’t assure returns. However, these funds ensure that fund manager never deviate from the investment mandate.