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A perspective on “quant funds” in the Indian context, a space that is in my view, a little misunderstood!
Quant funds in India are bizarrely classified as sector funds. Quant is not a sector. It is a style of investing - rule based with little (but not zero) fund manager discretion. This style can be applied to stock selection, asset allocation, bond timing, country selection.
This style like every other style is highly nuanced - you have everything from high frequency funds that use technical factors, with high churn, to simple fundamental models that change equity allocation basis a PE ratio. All of this at some level is quant - it involves a model.
Quant as a style eliminates bias - that’s a good thing. But remember the fund house has to show the ability to follow the model through good and bad cycles. Models do badly, and there is tremendous desire to tweak models. So how much you can follow the model matters.
Quant adds transparency and process orientation. That’s not to say traditional fund management is not process oriented. It is. Perhaps the process is better disclosed in quant funds.
Quant as a style works in certain asset classes - highly liquid ones where information edge is less relevant. It is good to do asset allocation, stock selection in large caps, bond timing, currencies. It works less well in small caps, credit, etc where judgement plays a role.
Models have phases where they don’t work. They rely on underlying quality of data to make decisions. Data like earnings comes out with a lag - and sometimes markets move ahead of these numbers. This COVID period with Q4/Q1 results I suspect could be challenging for quant models.
At these points, you do take the discretion to not follow models or tweak the output because data is not the best way to make a decision. That’s why I sent every quant fund in reality requires some human intervention to cater to realities of managing money.
Quant has had mis starts in India because it has been sold on backtests. Backtests IMV no matter how well intentioned mean nothing. They are at best an indicative guide for how a strategy performs. In a single factor strategy they still carry some value.
In multi factor and more evolved models, they mean even less. Every backtest can be engineered to look good. Any quant funds should be evaluated basis real track record in the way that any standard equity fund is evaluated.
Quant funds are not new in India! They have existed on the MF and PMS platform for a decade but never taken off. They are often marketed on backtests, with high expectations, scale in great years of performance, and then in poor years, scale back down.
Much as we quote Buffet when we want to appear smart about fundamental investing, we quote Bridgewater and AQR when we want to appear smart about quant funds. As an AQR alumnus, quant in India and quant globally are two different worlds!
More process driven investing should grow in India, but quant shouldn’t be marketed as magic. They do what fundamental guys do, they look at the same metrics, but they rely on rules. Statements like they will do well in volatile times for instance - make no sense!
Finally, at Edelweiss AMC, we actually love this style. So much so that we have run our large cap fund in this process driven way for 10 years. And our BAF as well. We believe large cap investing should indeed be more process driven as should asset allocation.
We don’t place these funds in a sector called Quant or name them like this. It is like placing our traditional funds in a sector called Fundamental.
The media often writes articles assuming that the only Quant Funds in India are the ones with Quant in their name. In reality, many funds run quant styles. Not just our large cap but many of the BAF funds that use models, are quant funds because they are ruled based.
And models have no magic! A fund doesn’t do well because it was a quant fund. It does well because the market environment was right for the style. I’m asked what the “secret sauce” for Edel BAF was this year. None. It’s a trend following fund - there was a trending market.
Finally, stay away from the myths. Quant funds are not riskier, they don’t do better in volatile markets, they don’t involve rocket science and AI (not the ones in Indian MFs). They do what all good fund managers do, and remember they are designed and run by humans. Cheers.
