How Quant Strategies are Relevant in the Current Market Scenario?

The widespread application of quantitative investment strategies is a relatively recent trend. Over the past few decades, the field of quant investing has made significant advancements in the world of finance. Additionally, this field has been evolving to create new investment technologies that ultimately simplify the process. This webinar blog will provide you with a better understanding of quant investing and illustrate how it has been relevant in the current market scenario.

PMS Bazaar recently conducted a Webinar on the topic, "How Quant Strategies are Relevant in the Current Market Scenario". The keynote speakers were Mr. Vaibhav Sanghavi, Co-CEO, Avendus Capital, and Mr. Mehul Patel, Fund Manager - Alternative & Quantitative Strategies, Avendus Capital. In this webinar, Mr. Vaibhav reviewed the recent ten months' market events and provided a brief market outlook, while Mr. Mehul Patel explained the Avendus Market Neutral Strategy. This blog covers some of the key insights covered in this informative webinar.

Key aspects of quant funds covered in this webinar blog are

Changes that happened over the last few months
Quant Funds
Market Neutral Strategies

1. Changes that happened over the last few months:

The Fed's stance since last September and October changed somewhat from being hawkish to discussing interest rate rises and quantitative tightening measures. As soon as this took place, India witnessed significant FDI selling, which continued until today. Over the past 10 to 12 months, India has already witnessed the sale of around 35 billion dollars worth of Indian stocks.

Fed, in a bid to control inflation, has been raising interest rates which is slowing down economic activity. The subsequent conflict between Russia and Ukraine in February and March further increased inflation, which has become a big problem globally. However, with all these variations, India has been one of the most stable emerging markets. According to Mr. Sanghavi, “India has been doing well in terms of economic growth, corporate earnings forex reserves, and Indian economy as such has been very stable and resilient.”

Considering the present global market situation, let’s understand what the Fed is likely to do over the course of the next three months and the following year. Going further, much will depend on how risk capital flows into various asset classes due to their outlook on interest rates. The Fed's current focus is entirely on inflation, and once the labor market conditions start to ease off, they will begin to consider pausing interest rate hikes.

The next two to three months are undoubtedly going to be quite turbulent because global markets would be hearing narratives about recessions, whether they're short-term or long-term. With that said, interest rates will stop rising from September to October levels—which, in a way, looking from a US 10-year perspective peaked at about 3.5 percent and are now at about 2.75 percent. The 35 billion dollars of selling in the last 11 months has decreased ownership in the Nifty from about 21 to 18 percent. However, because of the extremely resilient Indian economy, both in the emerging markets and in absolute terms across the globe, India is likely to see a very brisk inflow of FDI after three months.

The current rally, which occurred from 15200 to 17500, is a little stretched. You can witness some amount of negative data coming from the global scene, as well. But, Once the situation improves, the Indian market will see very aggressive risk buying. Therefore, in the shorter term, the market may extend the rally beyond the comfort of valuations. On this note, Mr. Sanghavi stated that “Given the performance of the previous years, we are likely to see through the choppy and volatile times in the market. You may see some intermediate corrections, but on a longer-term basis or a medium basis, we do think Indian markets would likely perform much better across you know as compared to the other markets from the globe.”

2. Quant Funds

A quant fund is an investment fund whose securities are chosen based on numerical data compiled through quantitative analysis. These funds are considered non-traditional and passive. They are built with customized models using software programs to determine investments. Proponents of quant funds believe that choosing investments using inputs and computer programs helps fund companies cut down on the risks and losses associated with management by human fund managers.

So what does this fund accomplish, and what is its main goal? The main goal of the fund is to produce a stable, consistent return over the medium term while limiting volatility and drawdown to levels below those of the typical market, such as the NIFTY.

3. Market Neutral Strategies Vs other Long Short Funds

A market-neutral strategy is a form of hedging that aims to generate returns that are independent of the market's swings and uncorrelated with both stocks and bonds. A market-neutral fund is a hedge fund that seeks a profit regardless of an upward or downward market environment, typically through the use of paired long and short positions or derivatives. These funds can potentially serve to mitigate market risk as they seek to generate positive returns in all market environments.

Agnostic Market Direction: Active strategy that aims to generate returns independent of market movements with zero/near zero net exposure
The strategy takes advantage of mispricing among a group of securities based on different fundamental and quantitative factors.
Funds take offsetting long and short positions using different underlying models that are based on company/industry fundamentals.
Models are built to take advantage of dispersions between factors like stock performance, sector performance, etc.

Advantages of Market Neutral Strategies:

Lower co-relation to broader markets
Low net exposure leads to low risks
Stable returns the majority of the time

Disadvantages of Market Neutral Strategies

Possibly higher costs due to active churn
Lower returns in rising markets

4. Long/Short Funds

A long-short fund is a mutual fund that holds investments long and in addition, it sells securities it does not own (short). The goal of a long-short fund is to find investments anticipated to go up and find investments anticipated to go down and invest in both in an attempt to increase returns.

Often, market-neutral strategies are likened to long/short equity funds, though they are distinctly different. Long/short funds simply aim to vary their long and short stock exposures across industries, taking advantage of undervalued and overvalued opportunities.

Market-neutral strategies, on the other hand, focus on making concentrated bets based on pricing discrepancies with the main goal of achieving a zero beta versus its appropriate market index to hedge out systematic risk. While market-neutral funds use long and short positions, this fund category's goal is distinctly different from plain long/short funds.

Mr. Mehul Patel and Mr. Vaibhav Sanghavi discussed the above topics in detail in response to MS. Riddhi Gupta’s questions. Further, they also answered questions from the audience towards the end of the session. For more such insights on the subject, watch the recording of this insightful session through the appended link below: