Quant funds utilize computer algorithms to guide their investment strategies. These computerized methods pick securities based on quantitatively identifiable characteristics. Rather than selecting stocks with a good story (e.g., Alibaba (BABA)), they select stocks based on various fundamental or technical criteria.
Many hedge funds follow quantitative strategies. Smart beta funds also follow these strategies. Last week, Morningstar announced that it is now designating quant exchange-traded funds (ETFs) as strategic beta funds. The investment research company described these funds as those that try to improve returns or isolate a specific return relative to a benchmark, increase or decrease the level of risk relative to a benchmark, or follow non-return or risk-oriented strategies, such as equal-weight strategies.
The basic idea behind quant funds is to identify anomalies or return factors that lead to higher returns or less volatility. By giving a preference to investments with these characteristics, higher returns, less volatility or both are sought. It can be an unemotional way to invest as long as personal biases are not allowed to interfere with either the creation or the execution of the model. The better you are able to stick to the model, the more you will be able to invest like a quant fund.
Creating your own model does require a level of comfort with a good screening program such as our Stock Investor Pro and, depending on the model used, a spreadsheet. If you are unwilling or unable to do the mathematical and computer work, following a quantitatively oriented screen or buying a strategic beta fund may be the better option.