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What's special about a quant fund?

Published on Fri, Nov 02, 2007 at 16:10 | Source : Moneycontrol.com

Updated at Mon, Nov 05, 2007 at 11:17

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Rajiv Shastri, Head - Alternate Businesses, Lotus India Mutual Fund

Excerpts from Midcap Radar on CNBC-TV18 Watch the full show »

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Lotus India Mutual Fund is launching a new quant fund called Lotus India AGILE Fund.

Rajiv Shatri of Lotus India Mutual Fund said the AGILE Fund is an open-ended equity scheme. The new fund offering opened for subscription on October 25 and closes on November 23. The NFO will invest 100% in equity and about 0-10% in debt and money market instruments. The benchmark index for this scheme is the Nifty.

The basic objective of quant funds is to provide investors with alpha in all market conditions, he said. Alpha is a measure of the fund's performance as against its benchmark index. The advantages of investing through these funds are consistency in strategy and better risk control. (View - New Fund Offers open NOW)

According to Shastri, Lotus India AGILE Fund's market capitalization will not be less than lowest stock on Nifty. Its floating stock will not be less than the least floating stock on the Nifty. The scheme will take into account the price history at least one-year before the date of investment. The industry represented by stock should be present in Nifty, he added.

Excerpts from CNBC-TV18's exclusive interview with Rajiv Shastri:

Q: Give us a rational value of a quant fund at a time when we are at all-time high levels in the market?

A: I am not managing the fund, the model is. There is no fund manger required for a fund like this. We have back tested this fund down to 11.5 years and this has performed extremely well in a bear market as well as in bull markets. So, it is not necessarily a bull market fund per se. It would in our estimate be able to outperform in a bear market as well. That is what it historically proved itself to do, so we are fairly comfortable doing it at this point.

Q: Have you back tested this completely in the domestic market because in international markets the subprime crisis has taken the whack out of a lot of quant funds? Also, like you said the quant fund model is going to be driving it and not you yourself.

A: Internationally, quant funds since they were launched in the 1970s in the US have evolved substantially. Many of them now run very significant high leveraged positions and it is the leverage which has actually taken the whack out of them. It is not the model itself. The model has not failed, the fund has, as the fund has either implicit or explicit leverage filled into it. Now, the model that we are launching here has absolutely no leverage at this point of time. We do not envisage investing through derivatives as well. So, it is just a 99% invested fund.

Q: What would be your strategy with your quant fund this time around? How do you hope to insulate it against the kind of leverage positions that we saw in funds internationally?

A: There is no leverage permitted in a mutual fund product in India, so regulatory restrictions restrict us from doing anything of that sort. Being the first product, we would like to keep it simple, so there is no leverage in the fund. Only the money that has contributed by the unit holders would be invested in stocks now. At no point of time are we saying that this is either a capital protected model or it will preserve the capital even if the markets were to go down significantly. The intention of the fund is to generate alpha or excess returns over significantly long time periods of at least a year.

We are fairly sure it would do that even through a bear market phase, given a period of time. It would give negative returns but these returns would be lower than those delivered by the markets.

Q: You said you have back tested it for about 11 years. What kind of returns did you see coming in on an average and what was the bad patch?

A: Since we have back tested it for so long, we have a one-year rolling return history that runs into close to 4,000 observations. On an average, the Nifty has given about 18% while this fund has delivered close to 35%. With slightly higher volatility, which actually translates into the risk-adjusted return, it is significantly higher than that of the Nifty. Also, it reduces the probability of negative returns. It also basically outperforms the market on the negative and on the positive. So, the back testing results have been very good.

For more Mutual Fund Interviews click here