What you need to know about Quant investing | The Financial Express

What you need to know about Quant investing

With the penetration of the Internet and technology, the present generation is learning and finding merits in the new approach of investing.

What you need to know about Quant investing
Quant methods are spreading across the investing world and will perhaps become the status quo.

The last two years saw a substantial rise in quantitative (Quant) investing products in India. Of the thirty-odd quant mutual funds, almost half came about in the past two years. What could be the reasons behind this? Let’s take a closer look to find out.

If you search for the greatest money manager on earth on the Web, the odds are you will only find James Harris Simons, the founder of Renaissance Technologies, showing up prominently. His Medallion Fund returned an average of over 66% annually before fees and 39% annually after expenses from 1988 to 2018. They are known to employ mathematical and statistical approaches to trading.

In the world of investing, a decade ago the talk was usually about Warren Buffett. Almost everyone wanted to follow in his footsteps, but there seems to be a shift now. The Buffet method of investing requires one to understand how the financials of a company work and how companies are valued. However, the Simons method requires none of that. It is more about analyzing numbers, in this case, the prices of securities.

Quant-based investing is about making use of computer models, algorithms, and other massive data sets to forecast future security prices. As a result, it takes out the human biases in the process, which include investing-related emotional or cognitive biases.

With the penetration of the Internet and technology, the present generation is learning and finding merits in the new approach of investing. Maybe, it is time that the methods of Simmons get the same, or even more adoption than that of Buffett’s.

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A data-driven life

From smart watches to CGM devices, people are seeking data to make better decisions. Investing cannot be left behind. Quantitative investing offers ways to analyze data, and understand the possibilities and risks, especially when applied to past data. It gives a sneak peek into the past, something that’s not possible with discretionary investing.

As a founder of an invest-tech platform, I believe this is only the tip of the iceberg, when it comes to quant-based investing and a data-driven lifestyle.

The flip side

However, one should keep in mind that the quant approach to investing is not a panacea. Quants make certain assumptions about the world. In simple words, they assume that the future would be a version of the past, and that may not always happen.

Quant approaches also have a shelf life. When everyone starts following the same approach, the edge starts fading out. It’s a constant quest for the next idea.

But as much as we may want, quant is just one piece of the puzzle. Humans are social creatures, we seek other people, their support, and thoughts, when it comes to all matters of life, including money.

The India story

India is still a nascent market when it comes to investments in the capital market, with only 1% of our population having any exposure to it. But the newfound interest in quant-based approaches to investing by both mutual funds (which are traditionally focused on creating products for the retail investor) and even Portfolio Management Services and Alternate Investment Funds (which focus on the HNI), talks about an increasing demand for quant-based products.

The larger developed world saw a similar explosion of interest in quant-based, algorithmically driven hedge funds way back in 2018 when the estimated size of quant driven exposure to markets went close to $1.5 trillion. What we see happening in India now could just be a game of catch-up being played.

Today, even the traditional fund houses and PMS houses in India are hiring data scientists and programmers to transform themselves into quant shops. Call it what you may but this trend seems to be here to stay for a while.

The future

Access to vast amounts of data and advancing technology is the new norm. Quant methods are spreading across the investing world and will perhaps become the status quo.

The nature of data may change, perhaps all the price data related edge that exists today in markets may get arbed out and alternative data could be the thing. Either way, the larger direction seems to be towards using data to make sense of the markets.

At the same time, it’s not going to be a cold robotic world of investing, humans would seek ideas and advice from other humans, perhaps a community of sorts working togethers using the quantitative ideas could be the immediate future.

Those who do not adapt may not survive. Indeed, we can expect interesting times ahead.

(By Aakash Goel, Co-founder and CEO of Investmint, a signal-based do-it-yourself trading and investing platform for retail investors)

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First published on: 02-12-2022 at 08:30 IST