Are quant funds actively managed or passively managed funds?
Mutual funds are largely categorized as actively managed funds and passively managed funds. If you were wondering what they are, they are basically two large groups of mutual fund schemes which are divided by one or several factors.
In actively managed funds, the fund house along with the fund manager actively participate in deciding what and where they are going to invest fund’s money. Actively managed funds have high chances of beating the fund’s benchmark. The fund manager is constantly ensuring that they buy / sell securities on behalf of the fund so that it can make the optimum use of diversification. Actively managed funds have usually outperformed their benchmark in the long run; however, the performance of every scheme is bound to differ from time to time. Most individuals invest in mutual funds because they lack the depth of knowledge about equity markets. They invest in mutual funds because they seek active risk management. Actively managed funds offer that. Since they are actively managed, these funds usually carry a high expense ratio.
On the other hand, passively managed funds generally mimic the performance of their benchmark, index, asset class or commodity with minimal tracking error. Passively managed funds follow the market index to achieve their investment objective. Although passively managed funds have fund managers, they aren’t actively involved. Fund managers are not decision makers when it comes to building the investment portfolio of passively managed funds. These funds work on predefined set of rules unlike actively managed funds where the fund manager is responsible for crafting the investment strategy. However, some ETFs are actively managed as well and hence investors must not assume that actively managed and passively managed funds are distinguished based on the fund type.
What are quant funds?
Quant funds are quite popular in countries outside India and are slowly gaining traction among Indian investors as well. Quant funds follow a investment strategy that is based on artificial intelligence. We all know how artificial intelligence technology is making its presence felt in almost every sector and industry and now has also entered the mutual fund space with quant funds. A quant fund builds its portfolio of stocks based on a pre-established AI algorithm. The AI software gathers numeric data through quantitative analysis based on which the fund choose and invests in a diversified portfolio of company stocks. The fund manager has very little participation as most of the investing is algorithm based. Stocks are chosen only if they fit in the criteria set forth by data driven model.
Are quant funds actively or passively managed funds?
By making the optimum use of AI technology, quant funds are offering a third dimension in the world of mutual fund investing. Since these funds purely function based on a predefined algorithm, they can be categorized as passively managed funds. The investment portfolio of a quant fund is based from the numeric data collated through quantitative analysis. There is not actively involvement of the fund manager in choosing securities for quant funds. These are non-traditional mutual fund schemes that are managed in a passive manner. Thus, the expense ratio of owning a quant fund is also low.
Quant funds are a high risk investment. Investors may even face losses if they aren’t able to adequately diversify their mutual fund portfolio. Investors should not depend on any one mutual fund scheme or asset class to generate income. Also, seek professional consultation if necessary.