Quantitative funds, also known as “quant funds,” are investment vehicles that use computer algorithms and other quantitative techniques to identify and trade stocks. They are often used to diversify portfolios, as they can expose investors to a wide range of assets and industries and may produce returns that are not correlated with those of more traditional asset classes like equities and bonds. Many SEBI Registered Investment advisors consider these types of funds along with other options or suggest such funds; some advisors even suggest portfolios of stocks that implement a quantitative model themselves.

One reason why quant funds may be a good option for diversifying a portfolio during times of market volatility is that they often rely on mathematical models to evaluate risk and make investment decisions. This can help reduce the impact of emotional or behavioural biases that can lead to subpar investment decisions during times of market stress. In addition, quantitative funds may be a source of steady returns, as they seek to identify and capitalize on patterns and trends in the market using statistical and mathematical techniques.

However, it is important to note that quant funds are not without risk. Like all investments, they are subject to market fluctuations and may lose value due to changes in market conditions.

Risks associated with Quant funds:

  1. Market risk: Like all investments, quant funds are subject to market fluctuations and may lose value due to changes in market conditions. Momentum-based quant funds are even more prone to this. When the going is good, everyone gets greedy but when markets tumble, then things can get bad really fast.
  2. Liquidity risk: Some quant funds may invest in securities that are less liquid, which means they may be harder to sell or may be sold at a discount in times of market stress. 
  3. 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 in certain market conditions.
  4. 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, which could lead to poor investment decisions.
  5. 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.
  6. Systematic risk: These funds may be vulnerable to risks that affect the entire market, such as economic downturns or geopolitical events.

When considering whether to incorporate quant funds into a portfolio, it is important to carefully research and understand the risks involved. This means conducting a thorough analysis of the fund’s investment strategies, risk profile, and past performance, as well as considering one’s own risk tolerance and financial objectives. It is always advisable to consult a good SEBI Registered Investment Advisor to help you navigate this decision.  It is also important to diversify a portfolio and not rely too heavily on any one investment vehicle.

In summary, while quantitative funds can be a useful tool for diversifying a portfolio and potentially reducing risk, they should be used as part of a comprehensive investment plan that takes into account an investor’s risk tolerance and financial goals. Investors should carefully consider the risks associated with quant funds and ensure that they are a suitable fit for their investment strategy.