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Can you make money without meeting management? Try maths

Published on Wed, Oct 28, 2009 at 11:12 | Source : Moneycontrol.com

Updated at Thu, Nov 12, 2009 at 15:17

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Can you make money without meeting management? Try maths

Myths About Quant Investing

Quant is a comparatively new field and people are often concerned whether the process works -

Myth: Quant investing is black box - there is no way to tell what is going on.
Reality: Untrue, quants use rule-based approaches and can often tell you exactly on what basis they invest. Fundamental investing is no less black box - you are relying entirely on the fund manager's analysis or call, which you can say nothing about.

Myth: Quant investors don't look at company fundamentals - they only look at technicals.
Reality: This depends on the type of quant. Technical analysts and high frequency guys don't look at company fundamentals but systematic or fundamental quants look almost entirely at fundamentals.

Myth: Quants invest in a lot of stocks - you cannot make money by spreading your bets so thin.
Reality: You cannot compare the number of stocks a fundamental investor holds to that a quant does. Fundamental investors make a few concentrated bets and count on most of them to work. Quants make many small bets and if more than 50% work, a quant has made money on sheer numbers.

Myth: The Indian market is operator driven. A quant approach doesn't work because there is a lack of good data for a quant process.
Reality: There is a lot of good data for the Indian market and Indian companies. The NSE has been around for 15 years and the BSE even longer, which makes for a statistically good dataset. As for the operators, operators exist in every market - a quant approach is about understanding when a company deviates from fundamentals because of these operators and benefiting from it.

Myth: Quant is a mysterious new approach. It is not tried and tested.
Reality: Quant, while new to India, has been around globally for 20 years. Some of the world's most successful money managers are quants - such as high-frequency quant Jim Simons of Renaissance Technologies which has returned 35% a year since 1989. Quant has been tried very successfully in many developed and emerging markets across various asset classes.

Quantitative vs. Fundamental - Which should I pick?

Both. No one approach is right and both approaches, if done well, make money. A quant approach works better with large liquid stocks where information is not an advantage and portfolio construction adds value. A fundamental approach works well with smaller cap stocks where the value add comes from detailed understanding of a company and meetings with company management.

What should you do? Diversify your portfolio by holding a few good fundamental managers and a few good quant managers. The most sophisticated international investors, both retail and institutional, allocate their equity exposures to different styles, of which quant forms an important piece. There is no reason why you shouldn't do the same. If you hold an equity portfolio, think about allocating a piece to a quantitative manager. Learn more about the quantitative process, understand the quant offerings in the market, and take a chance on a quant manager you have faith in. You've got many guys who meet management in your portfolio, try one who does maths.

- Radhika Gupta

The author is co-founder of Forefront Capital Management, a specialized portfolio manager providing equity investment solutions. She can be contacted on radhika.gupta@forefrontcap.com

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