Artificial intelligence (AI) and machine learning (ML) have gained worldwide attention, impacting every conceivable industry and altering how we view the overlap between humans and machines.
The mutual fund industry has also adopted AI and ML. Over the past few decades, active investing has dominated the Indian market, where the fund manager’s aptitude for identifying top-performing stocks and the proper sectors has been highly regarded. Quantitative funds have, however, grown significantly in favour in India as a result of fund managers’ recent struggles to surpass benchmarks.
What are Quant Funds?
Quantitative investment is comparable to both semi-active and semi-passive investing. Although an algorithm controls it, the fund manager makes final investment choices. However, standards and investing laws dictate this course of action. The rules and standards that have been developed are supported by automated algorithms and mathematical and statistical approaches. This raises the possibility of random decisions.
Quantitative funds generally have a history of offering downside protection and are, therefore, safer, but their returns fall short of those of standard funds. Cautious investors are better suited for these funds.
How did Quant Funds become famous?
The recent increase in the popularity of quant-based funds has been primarily attributed to big data technology and easy access to a wide variety of market data. They continue to be effective and precise even when dealing with a lot of quantitative data.
By expanding the amount of information on which they can work, paradigm shifts in technological progress, notably automation, also substantially impacted the establishment of quant funds. They were able to acquire enough feeds. As a result, to fully assess the potential and susceptibility. Quants utilise their models to increase their chances of outperforming the market.
Features of Quant Funds
Scalability: These are also entirely scalable because they are created in a lab setting and frequently deployed following thorough testing and development. The design is typically centred on a specific market and made to scale the firm.
Predictable Results: Since the quant fund strategy adheres to a predetermined technique and approach, the outcomes are frequently predictable. Unlike conventional mutual funds, such funds are not based on human judgments or the fund manager’s market view.
Previous data analysis: These Quant Fund models are based on mathematical theories that have stood the test of time and historical data. As a result, they might act differently due to any market disruption or unforeseen variable movement. It might have adverse and unanticipated effects in these situations.
Advantages of investing in Quant Funds
- These funds are based on impersonal decision-making because there is little human involvement. In addition, compared to traditional mutual funds investment, there is a lower chance of errors.
- There is higher risk control because it follows a predetermined investing plan despite the fluctuating market conditions.
- This fund is cost-effective with low management charges because of its trustworthy and passive investing strategy.
Disadvantages of investing in Quant Funds
- Quantitative models can only select stocks based on pre-set criteria. If a high-potential stock does not meet this requirement, the model will ignore it.
- These investments are based on historical performance and performance in the past. Additionally, some models may not account for unforeseen circumstances. As a result, these funds cannot guarantee a profit.
- Risky quantitative funds include those that employ short-term strategies or make bear-proof claims. Utilizing derivatives and leverage while predicting downturns may be difficult.
Considering all the dangers and unpredictability that Quant investing entails, objectivity, a respectable level of transparency, and lower costs present a strong argument. Therefore, you should only consider investing in Quant with a long investment horizon if you are a risk-taking investor with a good understanding of markets and possibly even this industry.