Are quant funds a good way to diversify portfolio during market volatilities?

Quantitative funds, also known as quant funds, use computer algorithms and quantitative techniques to locate and trade stocks. They offer a systematic approach to investing, reducing the impact of human emotion on decision-making and providing diversification to a portfolio.

During volatile times, quant funds can be beneficial due to their low correlation with other asset classes, tactical nature, and potential for outperformance. However, there are risks associated with quant funds, including market risk, liquidity risk, model risk, data risk, human error risk, and systematic risk.

“Quant funds often use a wide range of investment instruments and strategies, which can help to diversify a portfolio and reduce overall risk.”

- Sonam Srivastava, Founder, Wright Research

Here’s a summary:

• Quantitative funds (quant funds) are investment vehicles that use computer algorithms and quantitative techniques to trade stocks.

• Quant funds can benefit a portfolio during volatile times through their systematic approach, diversification, low correlation with other asset classes, tactical allocation, and potential for outperformance.

• They reduce human emotion's impact on investment decisions and provide a more systematic approach to managing risk.

• Quant funds use a wide range of investment instruments and strategies, leading to portfolio diversification and reduced overall risk.

• They may have a low correlation with other asset classes, offering additional protection during market volatility.

• Quant funds can shift allocation based on market direction and maximize performance while reducing portfolio risk.

• Quant funds have the potential to outperform traditional strategies during market stress or uncertainty.

• Diversifying portfolios with both quant funds and discretionary funds can be beneficial due to their low correlation.

• The concentration of methodology in quant funds can pose risks, and relying solely on one factor like momentum may lead to disappointing performance.

• Multi-factor portfolios are recommended for better diversification.

• Risks associated with quant funds include market risk, liquidity risk, model risk, data risk, human error risk, and systematic risk.

• Quantitative funds should be used as part of a comprehensive investing plan that considers an investor's risk tolerance and financial objectives.

Read the full article here on Mint.

To learn more about Quantitative Trading check out these articles

1. What is Quantitative Trading?
2. Best Quantitative Investment Strategies 2023