How quant investing can help investors to make money? Siddharth Vora of Prabhudas Lilladher explains

Sometimes human behaviour and emotional biases can put investors in a fix in a volatile market. In an interaction with Business Today, Siddharth Vora, Head of Investment Strategy and Fund Manager–PMS, Prabhudas Lilladher said that quant strategies could help investors to stay away from biases. He also said that a quant is a rule-based approach that uses human insight to develop models, but uses technology to bring discipline, rigour and repeatability by avoiding multiple human biases. Edited excerpts:

Business Today: What is quant investing and why is it important in the present world?

Siddharth Vora: Quant investing is where investment decisions are based on vast data, systematic rules and a repeatable process that is rigorously tested across economic and market cycles. Quant strategies are scientifically constructed, rule-driven investment models to achieve an investment objective which for example, could be generating alpha or superior risk-adjusted returns.

This is unlike traditional active investing which is based on the skill and experience of the fund manager. Thus, there is no room for any biases which could cloud the judgement of the fund manager and thereby affect the profitability.

Humans have better insights and intelligence and computers have better accuracy, reliability, speed and consistency when it comes to processing a large amount of data. We do not propagate choosing one over the other, but rather blend the best of both worlds into quantamental investing.
 
BT: How does quant investing work? Is it man versus machine or man with a machine?

Vora: Quant is a rule-based approach that uses human insight to develop models, but uses technology to bring discipline, rigour and repeatability by avoiding multiple human biases. It uses human intelligence to build models, but machines’ capability to validate the investment strategy and process vast amounts of data. The rigour and discipline are of the machine but wisdom comes from humans. We blend human intelligence and machine power to get the best of all worlds.
 
BT: Do you think quant investing will be the future of investing?

Vora: The advantages of quant investing over traditional human-managed investing are the reasons why quant is likely to be the future. This includes:

a) Wider coverage of data with fast processing, enabled by computers leading to faster quality investment decisions.

b) Quant is flexible and can run for any investment style depending upon the market conditions.

c) Quant is not emotional and does not base (sub-optimal) decisions on greed or fear, resulting in better long-term returns.

d) Quant is reliable because it is not based on any art of stock-picking but on a rule-driven model which can also be back-tested.

e) Reasons for under or overperformance are clearly attributable, enabling us to continuously improve and evolve your investment model in a dynamic world. This also makes quant transparent, unlike a gut-based decision-making process.

f) The investment exits are based on a set of rules and discipline, thereby reducing downside risk and improving returns.

g) Superior risk management has given a consistent model regardless of changing market conditions.
 
BT: What is the success rate of quant investing? Do you have any back-testing data?

Vora: From June 2006, the historic backtests of our long-only multicap equity strategy has generated an average return of 23.21 per cent against the benchmark return of 11.67 per cent.
 
BT: How your quant-based strategies have performed since inception?

Vora: Our Multi-Asset Dynamic Portfolio which runs as a PMS strategy has given a return of 1.36 per cent for the last 1 month, 2.20 per cent for the previous 3 months, 3.79 per cent for the last 6 months and 3.23 per cent in the last 1-year period (as on January 25, 2023).
 
BT: How quant investing is different from qualitative investing?

Vora: Eliminates fund manager style biases: Quant is flexible and can run for any investment style depending upon the market conditions. A fund manager might have a particular style of managing money that may not work across all market cycles. A specific style of investing might perform in one cycle but underperform if the market or economic backdrop changes.

Data-driven analytical approach: Quant is reliable because it is not based on any art of stock-picking but on a rule-driven model which can also be rigorously researched, tested, and continuously improved

Overcomes the Black-box model fallacy through rule-based quantitative investing: Reasons for under or over-performance are clearly attributable, enabling us to continuously improve and evolve your investment model in a dynamic world. This also makes quant transparent unlike a judgement and intuition-based decision-making process.

Mitigation of human behavioural and emotional biases: The systematic approach that quant investing follows help eliminate behavioural and emotional biases as it does not base (sub-optimal) decisions on greed or fear, resulting in better long-term returns.

Increased breadth, speed and accuracy of data processing: Wider coverage of data with fast processing, enabled by computers leading to faster, objective and accurate investment decisions.

Robust decision-making framework for actionable insights: Superior risk management given a consistent model regardless of changing market conditions. The investment exits are based on a set of rules and discipline, thereby reducing downside risk and improving returns.
 
BT: What are the global trends as far as quant investing is concerned? What is the AUM of quant funds managed in India as compared with global markets?

Vora: Quant funds have grown around 12 per cent CAGR from 2014 to 2019 in the USA, as compared to actively managed funds which are losing market share every year for the last decade. As of October 2022, quant-driven MF schemes in active space are less than 0.5 per cent of India’s total mutual fund AUM but are on a meteoric rise given a low base, strong outperformance and higher awareness amongst investors. In contrast in 2019, around 35 per cent of market capitalisation was owned by quant-driven funds in the USA.
 

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