What is Quant Investing

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Quant Investing | Basics Explained

Did you know that emotional biases cause investors to make suboptimal decisions, leading to lower returns? Imagine making investment decisions without the influence of emotions – a world where fear and greed don’t sway your choices. As humans, our lives are filled with preferences – from favourite foods and friends to movies that tug at our heartstrings. Emotions play a significant role in shaping these choices, and it’s perfectly natural in daily life. However, when it comes to investing, emotions are best kept aside as it brings in irrational fear, greed, and many other biases. All too often, having a favourite investing style or letting emotions dictate our investment decisions can lead to counterproductive outcomes and sub optimal returns.

Cognisant of this, investors have been seeking a more objective approach to investing. And that’s where Quant Investing steps into the spotlight.

In this article, we’ll delve into:

  • What is Quant investing
  • Adoption of Quant investing
  • Pioneering Quant investing in India
  • Investing in Quant

Watch Siddharth Vora, Head – Investment Strategy & Fund Manager at PL PMS talk about why he believes quant is the future of investing | https://www.youtube.com/watch?v=1KuqYa6twXQ

To read more on Portfolio Management Services (PMS’), click here.

What is Quant Investing

Quant investing, at its core, is a data-driven, rule-based, objective and unbiased way of investing that transcends human biases. By using a tech-driven approach, Quant eliminates human biases and provides investors with a repeatable and sophisticated investment experience.

Globally, quant investing has made strong inroads. In the US, ~35% of the investments have already been allocated to quant funds. In India, this number is ~0.5%, which shows that that there is immense growth potential for Quant investing in India.

Driving the growth of quant investing in India are three key factors:

  • Availability of data
  • Access to technology
  • Availability of talent that understands how to leverage data and technology to improve investment decisions

Adoption of Quant investing

A culmination of the above factors has led to adoption of quant investing across various investment avenues, including Portfolio Management Services (PMS’), Alternate Investment Funds (AIFs), and Mutual Funds.

Based on the analysis model used, there are broadly two categories of quant funds.

  • Single Factor: Built around specific factors like valuation ratios, fundamental metrics, and statistical phenomena. It results in a portfolio of top-ranked companies based on one of these factors.
  • Multi-Factor: Using quality market data, these strategies combine two or more factors, offering enhanced reliability, lower risk, and better returns.

Pioneering Quant investing in India:

PL has been at the forefront of quant investing in India. The PL team seamlessly blends traditional investment wisdom with cutting-edge quantitative techniques to craft differentiated strategies. The consistent outperformance of these strategies has firmly embedded Quant investing within PL’s investment ethos. For instance, PL’s latest PMS strategy, AQUA, is a state-of-the-art quant-based long-only equity strategy. It enables sustainable alpha generation through a dynamic multifactor approach. To read more about AQUA, click here.

Meanwhile, Multi Asset Dynamic Portfolio (MADP) is PL’s flagship quant-driven, trigger-based tactical asset allocation strategy. It aims to deliver superior absolute risk-adjusted returns across market cycles. To read more on MADP, click here

Quant’s ability to leverage data, eliminate emotional biases, and deliver steadfast performance makes it a compelling choice for investors. With PL, you can invest in industry-first, quant-based strategies like AQUA and MADP. Check out the full bouquet of PL’s PMS offerings here. Curious about the benefits of investing in PMS? Read our previous blog here.

Investing in Quant

Quant investing can be a game-changer. However, with an array of strategies available, it’s crucial to navigate the options wisely. Here’s how you can select and evaluate the right quant strategies from an investment perspective:

  • Strategy Selection: Start by understanding the various quant strategies available, such as Asset Allocation, Long-Only Equity, Factor Strategy, Long Short, Factor Rotation, Sector Rotation, Thematic, and Smart Beta.
  • Identify Objectives: Look for the objective of the strategy you are considering. Is it to generate alpha, achieve absolute returns, maintain consistent returns, or outperform relative benchmarks? Ensure it aligns with your own investment objective.
  • Analyse Returns: Evaluate the strategy’s historical performance based on Best, Worst, and Median Rolling Returns. Compare how it performed during challenging market cycles (drawdowns) and how it generated alpha during favourable conditions.
  • Check Risk-Adjustment Measures: Find the risk-return of the strategy through metrics like Sharpe Ratio, Sortino Ratio, Jensen Alpha, and Treynor Ratio.
  • Assess Frameworks: Understand the risk management, model construction, model design, and overall architecture of the quant strategy. A well-defined and robust framework can enhance the strategy’s potential for success.
  • Enquire about the Fees: Don’t overlook the fees associated with the strategy and weigh them against the expected outcome. This is important as the fees will impact the net returns on your investment.

So, ensure that emotions do not get the better of you!

Quant investing presents an innovative and data-driven solution to overcome the pitfalls of emotional biases in traditional investment approaches. As technology and data analytics continue to evolve, the role of quant in shaping the future of investment strategies is poised to grow significantly. By evaluating the above aspects, you will be able to select the right quant strategy that aligns with your investment objectives and ensure a well-informed and strategic investment approach.

To understand more on quant investing and how you can benefit from it, visit: https://www.plindia.com/portfolio-management.aspx or write to pms@plindia.com

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