What is a Quant Fund?
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.
How a Quant Fund Works
Quant funds rely on algorithmic or systematically programmed investment strategies. As such, they
They use quantitative analysis rather than fundamental analysis, which is why they’re also called quantitative funds.
Not only can they be one of many investment offerings supported by asset managers, but they may also be part of the central management focus of specialized investment managers.
Greater access to a broader range of market data fueled the growth of quant funds, not to mention the growing number of solutions surrounding the use of big data. Developments in financial technology and increasing innovation around automation have vastly broadened the data sets quant fund managers can work with, giving them even more robust data feeds for a broader analysis of scenarios and time horizons.
Large asset managers have looked to increase their investment in quantitative strategies as fund managers struggle to beat market benchmarks over time. Smaller hedge fund managers also round out the total quant fund offerings in the investment market.Overall, quant fund managers seek talented individuals with accredited academic degrees and highly technical experience in mathematics and programming.
Characteristics of Quality Securities
Investors have a defined set of criteria that they use to determine the quality of securities. The selection criteria include the following factors:
1. Financial strength
Companies with strong financial strength can withstand adverse financial conditions or unexpected events in the markets. The company’s financial strength can be demonstrated by a strong balance sheet, a high volume of sales and profits, and the ability to generate sufficient cash flows to meet the operating costs of the company. Also, strong companies tend to report consistent positive results for several years in a row.
On the downside, companies burdened with debts will grow slowly since most of the resources are diverted to pay the cost of liabilities. Investors can also use financial ratios such as the debt-to-equity ratio and the interest coverage ratio to determine a company’s financial strength.
2. Economic moat
The term “economic moat” was coined by Warren Buffett to describe a company’s competitiveness in the market vis-à-vis its competitors. Quality companies possess an economic moat, and it allows them to take a leading market position. Also, the company can protect its market share by creating barriers to entry to deter potential competitors from the market where it operates.
3. Corporate governance
Corporate governance relates to how a company is controlled and operated. Governance structures in a company determine how rights and responsibilities are distributed among participants in the corporation and the procedures for making decisions relating to the company.
A quality company employs a professional management team that can see potentially lucrative opportunities and capitalize on them. Also, there should be low turnover rates among managers in the middle- and upper-management levels.
4. Attractive valuation
Valuation is an important factor in determining the quality of a company in its specific industry. Companies with attractive valuations are characterized by a low price-to-earnings ratio, price-to-book ratio, and a high discounted cash flow. A company that’s been able to maintain an attractive valuation over time can offer quality securities to investors looking for stable returns in the future.
5. Dividend-paying stocks
When looking for potential companies to invest in, investors are more interested in owning stocks in companies that pay dividends consistently.
A history of consistently paying dividends to shareholders shows that the company’s reported enough revenues over the years to sustain its dividends payouts. Also, a history of dividend growth is an added advantage to investors since they are assured of regular and growing dividend payments over time.