What is a quant-based fund?

What is a quant-based fund? How is it different from other mutual funds?
- Partha

A quant-based fund is a strategy. It is a mathematical formula based on the ratio of a fund investing in companies that align with certain quantitative parameters. For instance, the fund will invest in a company growing at 20 per cent for the last three years, etc. So the quant fund is less on emotion and high on mathematics and discipline. You develop a quantitative framework on factors such as the company's financials, technicals, the state of the market, or the state of the economy, to govern the strategy or the design or the asset allocation of the fund. There are quant models which govern the asset allocation of the dynamic asset allocation funds. Then there are quant models based on which people pursue their small-cap, multi-cap, or equity allocation strategies. Depending on the quantitative model, the fund decides whether it should be heavily into large cap, small cap, etc.

How is it different from other mutual funds? In other mutual funds, the fund manager applies his mind or subjectivity that this company will do well for these reasons where some might not be quantifiable. For instance, the fund manager might think that people are too excited about a particular stock, which can be a red alert for him. Likewise, there could be a variety of other subjective things which he will be banking on.

This article was originally published on December 24, 2021.