Indian alternative investments: How do quant strategies help in consistent returns?

In alternative investments, the quant strategy has the potential to generate sustainable returns with its dynamic asset allocation and risk mitigation measures, eliminating emotional bias. But did you know? In India, less than 1% of assets are managed through quant, while it is 35% in the US. Read to understand about a style-agnostic quant PMS strategy that generates superior risk-adjusted returns.

PMS Bazaar conducted its second edition of the Dubai Alternative Investment Summit (DAIS) on February 17, 2024. As part of this event, the company invited various industry experts to share their insights on the Indian alternative industry. One such expert, Siddharth Vora, Fund Manager, Head of Quant Investment Strategies & Executive Director, Prabhudas Lilladher, presented the potential of generating consistent returns quant strategy in the alternative investment. His topic on the event day was: Investing in India using quant strategies for sustainable alpha.

Siddharth Vora presented opened his presentation with a glimpse into Prabhudas Lilladher's 80-year legacy in the financial services industry which included multiple businesses including investment banking, wealth management, asset management, trading and broking, institutional equities and NBFCs. He then briefly highlighted India's economic growth and potential to become the third-largest economy by 2028.

Next big thing: Quant investment strategies

Vora emphasised the strong correlation between economic trends and market performance, suggesting it is an opportune market for investment strategies that adapt to these changes. He added that his company follows a quantitative investment approach – a man-with-machine approach. He highlighted the underutilisation of quant strategies in India, with less than 1% of assets managed through this approach while 99% of the assets are managed via active and passive. In comparison, in the US, 35% of the assets are managed by quant strategies and the rest are in active and passive investment approaches.

Vora positioned quant as the next big thing with active investing slowly fading out. He believed quant offers several advantages, including eliminating emotional biases, employing rigorous analytics, and testing, ensuring complete transparency, enhancing risk management, and enabling efficient data processing. He underscored the need for adaptive investment strategies, given that different market styles and cycles require flexibility.

Vora then explained Prabhudas Lilladher's SMART philosophy (Systematic Design, Measurable performance, Adaptive Models, Repeatable Alpha, and Transparent Attribution) that underpins their quant strategies.

PL’s quant strategy: AQUA

He introduced the AQUA strategy that dynamically allocates investments across growth, value, and quality styles based on prevailing market regimes. This is based on three risk zones (risk-on, risk-transition and risk-off) which focus on different investing styles such as growth, momentum, high beta investing, value, quality, low volatility, and dividend across market-cap depending on the risk phases. The AQUA strategy invests in a flexi-cap universe (across large, mid and small-cap categories) of top 500 stocks, with multiple filters and then builds a portfolio of 25-30 stocks with individual weight capped at 4%.

Vora also stated the stringent measures in place to mitigate risks detailing that the strategy excludes illiquid stocks, employs multiple fundamental filters to screen companies with sound financial health, periodic rebalancing (every 2 months), diversification and more.

He concluded his presentation by showcasing data on AQUA's outperformance against benchmark indices across various timeframes and ended his speech by reiterating the advantages of investing in quantitative strategies like AQUA.

Watch the entire presentation to understand more about the quantitative investment strategy of Prabhudas Lilladher for investing in Indian alternative assets.