Quant funds use computer models to make investment decisions, removing emotional bias. However, the accuracy of the models relies on the quality of the data entered. Some funds use a hybrid approach, combining computer-generated recommendations with human expertise.
Also known as quant funds, quant funds are investment or mutual funds that use the quant analysis process to make decisions regarding the selection of securities as investments. The idea is to make use of models created using software to assess the potential of a given security, and make a decision on whether to buy or sell that asset. In a pure quant shop situation, computer models provide the recommendations to buy or sell, without any actual input from a human money manager. More often, quant funds use both computer-generated models and a fund manager’s expertise to make the final decisions about what is bought and what is not bought for the mutual fund.
Proponents of quant funds often point out that the use of computer models helps remove the element of sentiment or other emotions from the process of evaluating various securities. In theory, this means that those using the models will only see the real facts and avoid speculation that is based more on hopes and instincts and less on consideration of past performance, current market conditions, and projected future movements. As an added advantage, the use of the models allows the analysis to be completed in much less time than an individual could handle the task.
Detractors of quant funds often respond with the observation that the analysis provided by the model is only as good as the data entered on the front-end. If the information provided for analysis is out of date or incorrect, the results will also be faulty. Without human intervention to verify the accuracy of the data and the logic of the recommendations that result from the analysis, the potential for costly fund management mistakes increases.
There are quant funds that use a hybrid process as a means of reaping the benefits of the models, as well as the experience of a competent fund manager. With this approach, the fund’s securities are evaluated using the computer model, providing recommendations that the fund manager can consider. If the fund manager finds that his assessment of a given security is in accordance with the recommendations, then trading will take place. If the fund manager does not agree with the recommendations, further investigation is done before any trading order is executed. This approach enables checks and balances to be established that improve the chances of making investment decisions that are ultimately best for the fund and its shareholders.
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