Technology has become central to the human society. It is also impacting the investment pattern. Quant funds use algorithmic, or algo-trading (systems make buy/sell decisions based on a predetermined formula after wide-ranging data analysis).
The process consists of using advanced statistical models on the basis of several specifications – price change, capacity, revenues, and financial ratios.
Quant funds usually follow a data-driven method. Usually, a specific model automatically identifies stocks on the basis of different data inputs that could or could not include fundamental data.
Similar to equity funds, quant funds have variations like large-cap and mid-cap. They are popular among portfolio managers.
Quant funds provide exceptional results if there is a very large liquid market, especially for long-only quantitative investing.
Some analysts believe a system cannot replace human capability, while quant fund managers feel that the model does consist of human intelligence and the use of algorithms simply removes human error in the investment process.
Quant funds screen all firms which are in line with their standards and identify the sectors & stocks that are performing well. This removes the fund manager’s authority to select a stock. The system would choose the stock only if it is in line with the standards that are incorporated into the fund’s model.
Quant funds may not recognize the impact of unknown changes since they are based on several assumptions. Hence, if a stock does not adhere to any historical pattern, there are possibilities that the model would not be able to forecast its movement.
Again, a quant fund would not buy even a good stock if trading volumes are insufficient. Returns from quant funds differ broadly. Hence, investors should analyze a funds’ previous record.
Globally, quant funds have a history of providing downside safeguard, but failing to match the returns from regular funds. These funds are appropriate for conservative investors.
A well-managed quant fund would have lesser volatility. Investors must look at volatility and then select. In conclusion, quant funds are a method to diversify the portfolio and not a replacement for regular funds.
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