You, as an investor, might have had to undergone a lot of psychological and emotional upheavals to decide what would be the ideal stocks in which you want to invest you hard earned money into. This a lot of times creates a bias, where in a stock that has a good track record in the past, may under perform due to volatile market conditions. Another stock which has been an under performer may prove to be the underdog of the market in future. Investing in stocks that may wipe away all most of your investments and force you into debt like a personal loan or a credit card loan etc, is not the course you want to foresee in future. So the dilemma of choosing the right stocks becomes high.
In order to eliminate such pressures, Quant funds were introduced. Quant funds are a mathematical tool designed to reduce human errors significantly. It is programmed model which involves certain mathematical formulae and quantitative parameters. This tool selects only those funds that fit its criteria to invest. Parameters like the fund’s earnings growth, profit growth, cash flow, price-to-earnings ratio, price-to-sales ratio, and stock price momentum. However, it should be understood that, each fund house has its own set of mathematical formulae that it formulates wherein the decision also vary.
Since the auto pilot alone cannot be left in charge to fly a plane, similarly, Quant funds cannot be completely relied upon. The quant funds definitely require human intervention in that manner. This tool requires historical records to be fed with, in order to predict the future trend and provide stock options based on their profitability.
But the main disadvantage is its disability to predict the outcomes of the markets. For instance, there can be certain economic events that might have not happened in the past, like the great recession of 2008. In such cases human intervention is demanded so that appropriate judgments can be taken by the fund managers to reduce the risk of your funds.
With the compiled application of mathematical tools like Quant funds and the value judgment of fund managers, investments can be on the safe route. With the increase in the proficiency in numbers provides by Quant funds and with the expertise of a fund manager, response to unforeseen circumstances can be combated effectively and efficiently.
What should you do as an investor?
If you are an investor with a high risk appetite, the amalgam of quant funds with fund managers may just do you right. If not, then this is definitely not your path to pursue. Since quant funds provide limited options to choose from, it becomes difficult for conservative investors to rely on such computer generated results since there is always an impending fear that sometimes you might get lucky and sometimes you may not. But investing about 5% in such funds may not be a big deal if the markets plunge downwards. However, it is better to evaluate the pros and cons of such funds carefully before you make your decision.