What is a Quant Fund?
An investment fund that selects securities based on quantitative analysis. In such funds, the managers build computer-based models to determine whether or not an investment is attractive. In a pure “quant shop” the final decision to buy or sell is made by the model. However, there is a middle ground where the fund manager will use human judgment in addition to a quantitative model.
The term “quantitative fund” also doesn’t tell you anything about the actual investment strategy being used. Any study of a company or an industry based on quantitative data can be considered a quant strategy.
Quanting strategy
Quantitative investment strategies have evolved into very complex tools with the advent of modern computers.There are even off-the-shelf programs that are plug-and-play for those seeking simplicity. Quant models always work well when back tested, but their actual applications and success rate are debatable. While they seem to work well in bull markets, when markets go haywire, quant strategies are subjected to the same risks as any other strategy.
Quant strategies are now accepted in the investment community and run by mutual funds, hedge funds and institutional investors. They typically go by the name alpha generators, or alpha gens.Quant models also open up variations of strategies like long, short and long/short. Successful quant funds also keep a keen eye on risk control due to the nature of their models. Most strategies start with a universe or benchmark and use sector and industry weightings in their models. This allows the funds to control the diversification to a certain extent without compromising the model itself. Quant funds typically run on lower cost basis because they don’t need as many traditional analysts and portfolio managers to run them.