Are quant funds a good way to diversify portfolio during market volatility?

“Quantitative investment funds are often used to diversify portfolios because they can expose investors to a wide range of assets and industries and produce returns that exceed those of more traditional asset classes such as equities and bonds.” are not associated with,” said Ram Kalyan Meduri, Founder and CEO, JAMA Wealth

How quant funds benefit a portfolio in volatile times

Sonam Srivastava, Founder, Wright Research, SEBI Registered Investment Advisor said that during volatile times quant funds can benefit the portfolio in a number of ways:

systematic approach

Quant funds use algorithms and data-driven strategies to make investment decisions, which can help reduce the influence of human emotion on investment decisions and provide a more systematic approach to risk management.

Diversity

Quant funds often use a wide range of investment instruments and strategies, which can help diversify portfolios and reduce overall risk.

low correlation

Quant funds may have a low correlation with other asset classes, which means they may not move in the same direction as the overall market. This can provide an additional layer of protection during times of market volatility.

strategic nature

Quant funds can shrewdly change the allocation depending on the direction of the market. While they can bet on growth stocks in a bull run, as the market turns, they can shift the budget to defensive stocks or value plays, thus maintaining an edge.

potential for better performance

Quant funds may outperform traditional investment strategies during times of market stress or uncertainty, primarily because of their specific mandate of maximizing performance based on expected returns while minimizing portfolio risk.

Vivek Sharma, director (strategy) and head of investments at Rose, a part of Estee Group, said neither quant funds nor discretionary funds can protect losses from market volatility. But research suggests that the correlation between volume and discretion is tenuous. So this tells us that investors would benefit from having both types of funds in their portfolios.

“The problem is not with the quantity or discretionary style of investment, but it is with the concentration of methodology. Many quant funds have been relying on just one factor, mostly its momentum, and investors are very disappointed that the momentum in 2022 How has Quant Fund performed. On an average, Momentum Fund would have lost money after counting fees, slippages and other transaction costs,” said Vivek Sharma.

He added that the best way to diversify is to select portfolios that are not focused on a single factor but are multi-factor in nature.

Risks associated with Quant Fund

Ram Kalyan Meduri, Founder & CEO, Jamma Wealth, SEBI Registered Investment Advisor said that the risks associated with Quant Fund are:

market risk

Like all investments, Quant Funds are subject to market fluctuations and may lose value due to changes in market conditions.

liquidity risk

Some quant funds may invest in securities that are less liquid, meaning they may be difficult to sell or may be sold at a discount in times of market stress.

model risk

Quant funds rely on mathematical models to identify and trade securities, and there is a risk that these models may be flawed or may not perform as expected under certain market conditions.

data risk

Quant funds rely on large amounts of data to make investment decisions, and there is a risk that the data may be inaccurate or incomplete, leading to poor investment decisions.

human error risk

Despite the use of algorithms and other quantitative methods, quant funds are still subject to the risk of human error, such as mistakes in data input or model development.

system exposure

Quant funds may be sensitive to risks that affect the entire market, such as economic downturns or geopolitical events.

Quantitative funds can help diversify a portfolio and potentially reduce risk, but they should be used as part of a comprehensive investment plan that takes into account an investor’s risk tolerance and financial objectives.