Quant investing is booming in India. Be it the portfolio managers looking after funds in Indian stocks or global hedge funds, they are all expanding. The adoption among Indian discretionary managers is also encouraging. They are using technology in different capacities. All this has helped retail investors, who now have quant-based mutual funds in their portfolios.
Understating quant investing
Quantitative or quant investing is also known as systematic or rule-based investing.
As per Vivek Sharma, Director (Strategy) and Head of Investments at Gulaq, a part of Estee Advisors, "The idea behind this is that the rules are pre-decided based on which stocks are selected and weights are decided. All decisions are based on rules, be it entry, exit or capital allocated to each stock. The advantage is that computers are able to churn huge amounts of data in no time and also the biases that might affect a human are not there."
The rules can be decided depending on risk and what investors want from the portfolio.
For example, if someone wants to invest in equity but does not want the portfolio to be too volatile, they can invest using low volatility.
"On the other hand, someone who wants to invest only in undervalued stocks can invest using rules which quantifies value investing,” Sharma said while talking to CNBC-TV18.com.
Indian investors and alternative data sources
Portfolio managers these days have very few options in terms of good quality alternate data. Even if it is available, the universe is limited to Nifty 50 or Nifty 100 stocks only.
Therefore, Sharma, feels that the use of alternate data in developed markets is quite common. Further, there is huge potential when it comes to alternate data in India in the next few years.
ML and AI in investment
Both machine learning (ML) and artificial intelligence (AI) are being extensively used in investing and trading strategies. "Their use ranges from portfolio construction, market regime estimation to efficient execution strategies," Sharma added.
Shift from traditional stock picking to systematic strategies
Both traditional investing and quant investing have their own pros and cons. Investors don’t necessarily need to look at only one of them.
According to Sharma, investors should have both kinds of strategies in their portfolio.
"Quant strategies tend to be uncorrelated to discretionary strategies and hence can help diversify portfolios if used along with discretionary strategies. The investment management industry is expected to grow at a good pace over the next 10 years because of the rising interest and capacity of retail investors to invest in equity. India is also going to follow the general global trend where we see that growth in quant investing is much more than the growth in discretionary investing," he told CNBC-TV18.com.
