Quantitative investing, simply called quant, is a style which follows a set of rules to evaluate and capture growth, sentiment, price trends, valuation and volatility in the markets.

Traditionally, most fund managers have a certain style or theme that defines them (‘Growth’ investing, ‘Value’ investing etc.).

Quant investment styles can be static, like value investing, or dynamic like theme capture or differential captures.

A theme capture style, as the name suggests, identifies apt themes in accordance with the prevalent macroeconomic trends. It adds value to traditional investing by bringing in data- and process-driven approaches to decision making and reducing subjectivity and fixation bias.

Worldwide, approximately a third of invested money is managed using passive quant methodologies such as indices and another one sixth with active quant methodologies.

The kind of quant investing practised at Edelweiss Mutual Fund, for instance, is adaptive. It starts with identifying factors which drive stock performance, such as size, value, growth and so on. Then it selects a different combination of factors for each particular macroeconomic environment according to suitability. The process of identifying and selecting these factors is objective and scientific.

Additionally, a set of risk controls are put in place while building a portfolio to ensure that it delivers consistently.

Also, the investments can be customised to a risk-and-return mandate or market capitalisation range.

Edelweiss Absolute Return Fund, for instance, tries to provide consistent returns that have low correlation with other investment options available. The fund also aims to protect investors from volatility that is inherent to Indian equity markets.

This fund endeavours to provide investors with more than 60 per cent of the upside in CNX Nifty over any twelve month period, while restricting the losses to less than 20 per cent of the downside in CNX Nifty Index over any twelve month period. Edelweiss’ EDGE Top 100 Fund invests in stocks of the 100 largest listed corporates by market capitalisation.

The scheme seeks to deliver higher returns for the same risk.

Investment in large cap companies is usually preferred during a period of economic uncertainty as these companies have survived business cycles.

But just like the performance of a car depends upon the processes and quality checks used by the manufacturer, so it is with quant mutual funds.

Good investment processes and implementation discipline ensure better and consistent performance.

(The author is CEO, Edelweiss AMC.)

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