Quant funds

Quant funds, also known as quantitative funds, are named for their quantitative investment style. They build on index investing principals, including a passive investment approach, computerized security selection and portfolio management, and low management costs. Quant funds use increasingly sophisticated computer modeling based on financial data such as price-to-earnings ratios, projected earnings growth, and past performance, rather than traditional research performed by securities analysts, to screen thousands of stocks and identify those that may outperform their benchmarks.

Proponents of quant funds say they take the subjective, or emotional, element out of investment decisions. However, some quant funds take a hybrid approach, using traditional managers to decide, for instance, which stocks in a portfolio to sell short for economic, regulatory, or other reasons that can’t be factored into a mathematical model.

Because so much of the security selection and portfolio management in a quant fund is computer-driven, expense ratios tend to be low. However, because of frequent trading in quant funds, they can have higher turnover ratios, which can lead to high trading costs and short-term capital gains, chipping away at fund return. It is important to weigh these factors against the additional return being generated by this type of fund to ensure that you are earning enough to offset the potentially higher tax burden.

Also, because quant funds closely guard their proprietary methodologies, there may be a lack of transparency, in some cases, regarding the specific strategies a quant fund follows, or the amount of investment risk you may be taking if you invest in one.

Another approach to index investing is to buy stock index options to hedge your stock portfolio. Or you can buy or sell contracts on index-based futures, which allow you to speculate on future changes in the value of a specific index within a particular time frame. Each contract is based on a specific index, and what the contract is worth at any time before it expires is determined by a variety of factors, including investor demand. Your profit or loss depends on how the index changes within a specific time frame and the position you’ve taken on the outcome.

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